It’s an ill wind, as they say. While stock markets fell on Monday in reaction to the killing of Qasem Soleimani in a targeted US strike in Baghdad, three types of shares did conspicuously well: oil businesses, defence companies and gold miners. It hardly needs spelling out why. After a strong 2019 for stock markets pretty well across the board, investors suddenly smelled war in the Middle East.
So is that theme for 2020? I wouldn’t count on it. First the geopolitics. From what we know of Donald Trump – and contrary to his image on the left – he is no great warmonger. He has tended to talk tough, but not to follow it up with a great deal of action. Look what he did with Kim Jong-Un: after threatening him by boasting of the size of his nuclear button, he de-escalated the situation and ended up meeting Kim and even flattering him by praising him as a leader. In Syria, Trump reacted to Assad’s chemical weapons attacks on his own people by launching 59 Tomahawk missiles at Assad’s military bases, but he never took it on from there. On the contrary, Trump has reduced US military presence in Syria. This time around is unlikely to be any different; the killing of Soleimani was a direct response to attacks on the US embassy in Baghdad. In spite of the Iranian counter-attack on Tuesday, Trump is unlikely to have any appetite – or strategy – for war in the way that George W Bush did.
Moreover, even if we did end up with all-out war in the Middle East the effect on global oil prices is unlikely to be as great as it was in the past – as the shale has made the US largely self-sufficient in oil and gas. So if not war stocks, what will be the winners in 2020? UK shares have been widely predicted to do well, having under-performed other markets over the past couple of years – the FTSE 100 was up 13 percent in 2019, around half that of US markets.
The obvious candidates to do well, given the Prime Minister’s reaction to his election win, are related to infrastructure, especially in the Midlands and North. Is there any share better designed to benefit from a Johnson government than Harworth Resources, a company which specialises in the regeneration of old coalfields and which leapt by 20 percent on the Conservative election victory?
There is also an interesting opportunity afforded by companies which have significant exports to the US, and which could benefit from a trade deal. Candidates to do less well – considering the sharp rise in the National Minimum Wage – are any businesses which employ large numbers of low-paid employees and will therefore suffer a rise in costs: supermarkets, restaurant chains and the like. On the other hand, rising incomes will also benefit some businesses – it might tip the balance and persuade more people to take a holiday. Of course, if the government fails to do a trade deal with the EU by its self-imposed deadline of the end of the year, we could end up back with the prospect of no deal, with the knock-on effect for businesses that trade heavily with Europe.
But then could it turn out to be an unexpectedly bad year for stock markets generally? The past few years have shown a tendency for markets to switch moods with the new year. Having enjoyed a strong period of growth between July 2016 and the end of 2017, markets wobbled at the beginning of 2018 and went on to suffer a poor year. They bottomed out on New Year’s Even of that year and last year proved unexpectedly strong. By that token the small wobble in the first few days of 2020 might not be so much a reaction to the air strike in Baghdad as a return of pessimism more generally. If it is any guide, 23 of the past 34 years have seen rises in the FTSE 100 and 11 have seen falls. In two cases – in 1995-99 and 2003-07 — we had runs of five years in which markets increased. We have also had runs of four and three years in which markets rose year on year. Negative years, on the other hand, have all come in ones and twos.
If you are looking for cause for cheer, on no occasion in the past 34 years has the FTSE100 recovered from a year of negative growth – as it did in 2019 – and not gone on to notch up at least one more year of growth. So there is at least some reason to hope that market momentum might make investors a profit in 2020.