Market update – January 2019
Following December’s sharp sell-off, here is a summary of our current economic and market views
Stocks fall sharply in December
Global equities fell over December, staging only a partial recovery in the days after Christmas. The MSCI World Index was down 7% over the month. This correction leaves the index 3% down over 2018 and brings to a close one of the worst quarters in years. US technology giants were especially hard hit: Amazon, which started the quarter with a $1 trillion valuation, shed almost 30% to a valuation of $722 billion by the end of the month. The market sell-off came as doubts over the strength of the global economy intensified further, with prospects for the US and China in focus.
A key indicator of market sentiment, the yield curve – which tracks the yields on US Treasury bonds of differing maturities – began to turn negative or “invert” in the early days of the month. This has previously been an indicator of future US recessions, and its appearance added to investor uncertainty, despite valuations for shares appearing more reasonable after recent falls. Sharp corrections often indicate further volatility and momentum may drag share prices still lower in the short term.
Interest rate policy adds to fear factor
Investors remained concerned that central banks – and the US Federal Reserve in particular – will maintain their planned policy tightening even in the face of a deteriorating economic backdrop. As shown by markets falling sharply after the US Fed’s mid-month announcement that they would raise interest rates by 0.25%. While the increase was not unexpected, markets appear to be more worried about the near-term economic outlook than the Federal Reserve and were hoping for a clearer signal from Fed Chairman Jerome Powell that a tighter policy path would be abandoned if necessary.
In the UK, where Prime Minister Theresa May is now battling to win MPs round to an amended agreement on the UK’s withdrawal from Europe, monetary policy is on hold. The Monetary Policy Committee stated that its response to possible Brexit outcomes “will not be automatic and could be in either direction”.
While the pace of earnings growth is weakening, our expectations for corporate earnings and revenue in the year ahead, coupled with improved (lower) valuations, mean that we are comfortable with our current exposure to equities. Diversifying assets such as property, infrastructure and absolute return strategies are used in portfolios where appropriate. We prefer an allocation to cash over bonds in anticipation of rising interest rates. Holding cash provides capital security and liquidity to invest when opportunities arise. As long term investors we expect such market turbulence and can remain committed to our investment strategy, taking advantage of opportunities to buy good quality assets at attractive valuations. As such, active asset allocation and investment selection are both important in this more volatile environment.
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