Capital Markets Update: December 2018

For professional advisers only. Not to be relied upon by retail investors.

Capital Markets Update

  • Review of 2018
  • 2019 outlook

 

In a nutshell

2018 was a testing year for investors. December’s equity market falls ended a difficult last three months that brought down the curtain on a year where very few investment asset classes delivered a return above cash. The sharp equity market sell-off in October resulted from a combination of geo-political issues that had stalked markets all year before finally coming to a head. None of those geo-political issues have gone away and we enter 2019 still wrestling with the uncertainty they have created.

Global growing pains

The International Monetary Fund downgraded its global growth forecasts in October and highlighted that growth in certain economies had peaked. Growth is still present but it is slowing and is less synchronised than it once was.

Volatility is nothing to be scared of

Market volatility returned in 2018, after a prolonged absence courtesy of the easy monetary conditions provided by central banks around the world. Central banks, led by the US Federal Reserve (Fed), want to start moving away from the stimulative measures of quantitative easing towards more restrictive quantitative tightening. For now, the policies of central banks continue to be supportive but they are likely to follow the Fed as and when they feel it appropriate to do so.

More or less for the Fed

The Fed’s interest rate path prescribed for 2018 of four rises, of 0.25% each, was implemented. Looking forward, markets don’t believe the Fed will raise rates as much as it has forecast for 2019. The market believes the Fed will implement anything from none to two interest rate rises in 2019 (the Fed has planned four). If the market is correct these rises could take US interest rates to anywhere between today’s range of 2.25% to 2.5% and 2.75% to 3.00%. On this basis, geo-political issues notwithstanding, a US-led recession is unlikely to be a problem to wrestle with in 2019, but one to possibly prepare for in 2020.

Trade wars

Arguably one of the bigger geo-political issues of 2018 were escalating trade tensions between the US and China. Initial signs from trade talks announced in November were encouraging. The hope for 2019 is that this matter is resolved amicably. If not, the ongoing escalation will make market conditions difficult.

Exit Brexit?

Another year passed and despite all the ‘to-ing and fro-ing’ there was still no clarity on Brexit. The uncertainty surrounding Brexit caused problems for the UK stock market and for sterling. The latter’s weakness, however, continued to be a benefit for both companies and investors with overseas earnings. The biggest fear is that the UK crashes out of the European Union with no deal. No one fully understands the consequences of what that might mean but it is unlikely to be good. We have to believe this is the least likely scenario (given neither party wants it to happen) but we can’t discount it entirely.

At the moment, the market isn’t pricing in a Brexit no deal so there is significant potential for sterling to fall in value should that happen. Any signs of a resolution or the removal of the threat of a no deal should result in sterling strengthening. Sterling weakness has been a boon to the UK stock market, particularly the FTSE100 Index, which is populated by global firms with overseas earnings. In the short term, it has also proved a bonus to overseas investments in UK investors’ portfolios. But a weak currency will eventually feed through to the UK consumer and the economy and weigh heavily on both.

2019 outlook

We enter 2019 wrestling with the same issues that stalked markets in 2018. The underlying market fundamentals remain positive but the geo-political risk has increased. While it would be easy to focus solely on the risks caused by the dominant geo-political uncertainties, we are also aware of the potential, particularly for equities, should any of the current issues be resolved. However, investors will have to tread very carefully.

The key for investors is to determine where we currently are in the investment cycle. The consensus is that we are late in the cycle, which tends to lead to a slowdown in markets and economies. The consensus is also that any move into recession is likely to come from the US and arise as a result of the Fed raising rates too far and too fast. However, for now central banks remain supportive.

This should be an environment where actively fund management, alongside a diversified investment approach, should be rewarded. Increased market volatility creates opportunities and a broad base of assets offers alternatives should any of the main asset groups continue to struggle.

We remain cautious and watchful and continue to work hard to provide a smother investment journey for our clients. In this type of environment it is useful to take a long-term investment view and try to avoid the market timing trap, where emotions can lead to poor investment decisions.

Oliver Wallin, Octopus Investments

e: owallin@octopusinvestments.com

t: +44 (0)20 7776 3153

 

Important information:
For professional advisers only. Not to be relied upon by retail investors. The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: January 2019. CAM07809.