It feels like it was yesterday when we were toasting to the New Year. Almost all the 365 days have gone by and we find ourselves looking at the year that was. With some hindsight we can say that the year that was, was nothing like the ones before. I invite you to join me in my short economic synthesis of this year.
The return of volatility
Possibly being the most dominant factor of this year was the return of adverse volatility. Over the previous years, investors had grown comfortable with the rising markets and little turbulence. February 2018 was a rude awakening after the first month of the year indicated a positive continuation of 2017. After years of positive total returns in the world’s main equity indices, investors experienced strong single to double-digit declines in their valuations.
In US dollar terms, the World MSCI index (a weighted basket of global equities) stands in negative territory in excess of 11 per cent, while this year retreats in major indices vary from negative 25 per cent for Chinese Hang Seng index to a negative eight per cent for American S&P 500 index. In understanding what have been the catalysts of this year’s negative market sentiment, we can possibly come up with a mix of trade policy, central bank policy, decrease in productivity, and overall negative sentiment.
Understandably, investors struggle to get around such declines in their valuations. This year’s performance in the equity markets should serve as a reminder that investing in equities does carry risk. Additionally, this opens a window of opportunity to those who were previously scared away from the market due to the relatively expensive valuations of the past years. Despite the market adversity, long-term equity market investors remain in positive territory. This may serve as a reminder that equity investments should be viewed as long-term strategies and not as a get-rich-quick scheme.
The bond market scene
Fixed income investors were not spared from sluggish returns. The rise in interest rates in the US was the catalyst of pressures over dollar-denominated emerging market debt, causing the implicit cost of borrowing to increase for these countries. Additionally, the stronger US dollar following a weak start of the year has increased the pressure on debt markets outside the US, as investors sought refuge in quality bonds. This flight to quality has hit the higher yielding parts of the market, which have been much sought by investors in the recent years, as rates stood at abysmal level.
The central bank policy
Central bank policy was always going to be a centre stage of this year’s event. The farewell of the former Fed chair, Janet Yellen, to the new chair, Jerome Powell, has kept the Federal Reserve in line with the previous trajectory with four rate hikes raising the interest rate from 1.5 per cent to 2.5 per cent. Despite the trade war concerns, the US economy was aided by the strongest job numbers in decades, coupled with inflation in line with the Fed’s target and GDP growth remaining strong despite withering from the previous year.
Conversely to international markets, the local equity market remains relatively unchanged on course to close in positive territory for the year
On the other side of the Atlantic pond, Mario Draghi, in the final year of his mandate, had a much dimmer picture to deal with compared to his American counterpart. The underlying economic and political turmoil in the Euro Area provided a far from reassuring picture towards normalisation of interest rate policy. Economic indicators all confirm an overall deterioration in the base figures of the Euro Area, as GDP growth decreased to 1.6 per cent, employment still remaining unchanged at a high 8.1 per cent, and inflation reducing its pace over the previous year. As expected, the biggest announcement was that of the termination of the ECB asset purchase programme effective as at December 2018. Despite this change being considered important towards the actual path of normalisation, the ECB (at least in words) remains accommodative committing to reinvest the proceeds from maturities of QE purchases.
Facing tougher odds during 2018, BOE Chancellor of the Exchequer, Mark Carney, hiked rates in August from 0.5 per cent to 0.75 per cent. However most of the BOE policy remains in uncertain territory, as in the words of Mr Carney himself “ we are close to a point of maximum uncertainty around Brexit”.
The local market
Finally, the local market offered some shelter to investors from the international upheaval. Corporate bond markets were a source of steady income generation, and overall capital stability. The local corporate main market introduced five new names, raising in excess of €100 million in fresh capital, while the prospects MTF market introduced in excess of €32 million in new capital, spread over six issues. The participation of local investors in the new issues and in the secondary market is a sign of confidence in the local debt markets.
The local sovereign market traced the movement of European sovereigns. This year markets followed the overall trend of increasing yields, in line with the expected winding down of the European Central Bank debt buying programme. This trend was interrupted at different stages as a result of rising global and European specific turbulences, which would indicate potential jeopardy of the expected outcomes.
Conversely to international markets, the local equity market remains relatively unchanged on course to close in positive territory for the year – under the apparent relatively muted year we note that the local market experienced some big moves in 2018. Companies like MIDI plc, MIA plc, GO plc, FIMBank plc and Simonds Farsons Cisk plc all gained strong territory during 2018, on positive results. The reason for the relative market underperformance was the retreat of the main component of the index BOV plc which muted most of the positive gains.
The finale
This year will be remembered as the year when financial analysts became political pundits as never as much as in this year has political risk carried such a weight on the financial markets. This has been really the year of the divergence, as the US has diverged from global markets, both in terms of monetary policy and in terms of trade policy. The picture of world leaders during the G7 summit baffled facing a cross-handed Trump has shown us a world split between two courses.
This article was prepared by Daniel Gauci HnD Management, CeFa Investments, an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email daniel.gauci@jesmondmizzi.com; http://www.jesmondmizzi.com