Weekly market recap: New Year, same markets

Unfortunately for investors, the themes from 2018 – trade wars, confrontation between superpowers, synchronised economic slowdown, and political crises across Europe have clearly not been resolved over the Christmas break.

Facebooktwittergoogle_pluslinkedinmailFacebooktwittergoogle_pluslinkedinmail   by Tertius Bonnin, 4th January 2019

Welcome to 2019. If you’re feeling sick of politics, I’d suggest this is not the year for you! We will see national elections for a third of the world’s population including India (over 1.25 billion people), Nigeria (Africa’s most populous country), and European Parliamentary elections for the 27 remaining EU states following the United Kingdom’s exit, due to take place in just a few months’ time.

All in all, 2018 was a miserable year for most assets with the exception for government bonds as investors de-risked their portfolios in the second half of the year. Asset class returns in sterling and local currency are below; sterling ended the year having depreciated around 5% against the dollar which cushioned the blow of the falling US market for UK-based investors.

Table 1: GBP total returns

Source: Bloomberg

Table 2: Local CCY total returns

Source: Bloomberg

Last month proved to be one of the worst Decembers on record for the S&P 500 – we have go to back to 1931 before we find a worse end to the year! While December is usually characterised as a quiet time, with many market participants and politicians in the Western world taking time off, the most recent festive period saw: a US federal government shutdown over a congressional dispute over wall funding, volatile energy markets, soft data emerging from the Chinese economy, and daily updates regarding the US-China trade war.

Though the US federal government shutdown is likely to have played a part leading into Christmas period, research shows that over the past 35 years government shutdowns have had a negligible effect on the direction of the stock market. That said, this shutdown is due to become the longest in US history this coming weekend. With this in mind, it is far more likely that the other factors mentioned above (i.e. energy market volatility, soft data from China and the trade war) were the more significant contributors’ to market volatility.

Chart 1: December 2018’s market move was the second largest December decline in the index’s history, and 11% below the average December return

Source: Bloomberg

In the last update before Christmas, I touched on weakening data emerging from China; subsequently Apple, the world’s largest technology company by revenue, has issued a trading update in which it revised down its revenue guidance citing weak iPhone sales in China. Shares dropped as much as -8.5% on this news, bringing the total amount lost from Apple’s market cap to $446 billion – equivalent to a little over the value of Facebook’s current market cap – from its peak in October.

Chart 2: Apple’s fall from grace as the world’s most valuable company saw it overtaken by both Microsoft and Amazon

Source: Bloomberg

Unfortunately for investors, the themes from 2018 – trade wars, confrontation between superpowers, synchronised economic slowdown, and political crises across Europe – have clearly not been resolved over the Christmas break as I perhaps overoptimistically had hoped. We will continue to operate within a challenging macroeconomic environment. I’d recommend reading a piece one of our Portfolio Manager’s, Kasim Zafar wrote about the outlook for 2019 in which he highlighted three concerns for us as we move into 2019:

  1. Deteriorating financial conditions caused by the US Federal Reserve and its path to policy normalisation
  2. How consumer and corporate sentiment will be affected by the US-Chinese trade war
  3. The damage to performance if we become too defensive too early in a late cycle economic environment

THE WEEK AHEAD

Monday: Canada Ivey PMI, ISM Non-Manufacturing PMI, US-China Trade Talks

Tuesday: Australia Balance of Trade, Japan Consumer Confidence, Eurozone Business Confidence, Canada Balance of Trade, US-China Trade Talks

Wednesday: Germany Balance of Trade, US Federal Reserve Minutes

Thursday: Australia NAB Business Confidence, China Inflation Rate, European Central Bank Monetary Policy Meeting Accounts

Friday: UK Balance of Trade, US Inflation Rate

STAT OF THE WEEK: $10,571,382,521,856 – the value shed by developed equity markets from peak to trough in 2018 (Bloomberg).

Data correct as at: 04/01/2019

About the author: Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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