A turbulent end to a year defined by the withdrawal of central-bank support
Further stock-market turbulence saw US indices suffer their worst December since the Great Depression in 1931, falling 9% in sterling terms. UK and European shares fared slightly better, falling by 3-5%, while Asian and emerging markets outperformed. For 2018 as a whole, the US held on to a 2% gain, but Asian, UK and European stock markets all fell by 9-10%.
The Fed hikes again but signals a slower path ahead
The US Federal Reserve defied President Trump's request for no more rate hikes, adding a further 0.25% to interest rates. Its forward guidance, however, suggested no more than two hikes in 2019, and a subsequent press conference in early January portrayed a further softening of stance, reassuring investors that the Fed was "listening carefully to markets' concerns" and that it was prepared to be flexible over future policy if warranted.
On the economic front there was a dichotomy between forward-looking industry surveys, which showed growth but at a slower pace, and the backward-looking jobs data, where strong demand for labour saw wages rising at an annual rate of 3.3%. Inflation remained subdued, reflecting the sharp fall in the oil price.
Bonds provide some shelter as political uncertainty persists
UK government bonds ended the month around 2% higher, though bonds issued by companies were tainted by the risk-averse sentiment and ended broadly unchanged. Over the year, UK government bonds were flat, corporate bonds fell by 2-3%, and some overseas bonds rose in value in sterling terms.
Governments in the UK and France survived no-confidence motions, although the results might well have differed had the public been allowed to vote. There was no progress in Brexit negotiations, and with the March deadline approaching, no deal remained the default position.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
How much bad news has been priced in?
There was little dispute that the economic outlook had become less rosy. The growth cycle was fairly long in the tooth, and most monthly industry surveys around the world had pointed to a slower pace of growth. But, for now, while there were plenty of individual concerns, many of these related to politics rather than economics. The global economy was still growing; the fear was whether trade disputes, rising populism or heavy-handed monetary policy would put an end to it.
We were not taking the risk of a slowdown lightly, but we did feel that stock markets were overdue a correction, and whenever this happens investors and commentators look around for something to blame. The uncertainty over Brexit had been a long-standing and justifiable concern for UK investors, as had the US-China trade row for most global investors. Add to this the rise of populism in Europe and concerns that the Federal Reserve would overtighten monetary policy just as the effects of the president's tax stimulus was wearing off, and one could conjure up a bleak picture.
However, our long-standing theme had been that the replacement of monetary easing with monetary tightening would force investors to reassess market valuations in the light of ongoing political and economic developments. The swing in market pricing was not extreme by historical standards, but it had come as a shock to many who had grown accustomed to running long positions, supported by central-bank action. So, the question was not just how these concerns would play out, but how much bad news had already been priced into markets over the preceding few months.
The question is not just how these concerns will play out, but how much bad news has already been priced into markets.
We remain overweight UK equities, which have suffered with the Brexit uncertainty, but which we think offer better value than most other markets over the longer term. Without the support of quantitative easing, we believe there is an even stronger case for choosing actively managed funds over passive alternatives.
Overweight UK equities
We remain overweight UK equities, which have suffered with the Brexit uncertainty, but which we think offer better value than most other markets over the longer term.
Active management over passive
Without the support of quantitative easing, we believe there is an even stronger case for choosing actively managed funds over passive alternatives. With returns likely to be harder to achieve, and the risk of more individual company mishaps, active stock-picking and sound investment processes should outperform.
Gold and silver as a diversifier
The Merian Gold and Silver fund benefited from increased volatility across stock markets, with safe-haven demand driving the price 8% higher on the month.
Underweight fixed interest
We remain underweight fixed interest, preferring equities, property and alternative investments. Where we do hold fixed interest, we mostly use funds that have limited exposure to rising interest rates.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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