If I had to find a word or phrase to describe the two faces to the markets in the final stages of 2018 and early weeks of 2019, ‘chalk & cheese’ comes to mind.
2018 was a tumultuous year for global capital markets, and to note that sovereign bonds were the only asset class across all asset classes which emerged unscathed in 2018 clearly puts into perspective the depth and broadness to which the market correction adversely impacted investments.
2018 was the worst year on record for global assets since the 2007/2008 crisis, and while the percentage drop in the value of investments for the calendar year was nowhere close to that registered 10 years ago, the decline was more widespread and less focused on a particular region, sector, asset class.
From High Yield to Emerging Markets to Investment Grade Corporates to Global Equities – investors were baffled by the pervasive impacts which the infamous trade war talks have had both on investor sentiment, but, in the greater scheme of things, on the wider economy. Those negative economic data prints which came as a result of the initial and ongoing trade-war talk from Q1-2018 were beginning to be felt in the last quarter of 2018, which could well explain the sharp global-wide correction.
However, the way the markets have performed so far this year are a far cry from what investors had to endure for the better part of 2018. Till last Friday, European High Yield was up by 1.59% (-3.37% % in 2018) , EM (Emerging Market) High Yield markets returned 1.87% (-2.46% in 2018), Global High Yield markets were up by 3.15% (-4.06% in 2018), US High Yield increased by 4.12% (-1.48% in 2018), while European and US equities were up by 4.50% (-12.03% in 2018) and 6.63% (-4.39% in 2018) respectively thus far.
For some asset classes, still a way to go to recover the lost ground last year but nonetheless a welcome sigh of relief for those investors who were becoming increasingly impatient seeing the value of their investments trickle downwards.
This initial flurry of investor exuberance can lend itself to a number of factors: (1) investors seem to be taking advantage of “unwarranted” beaten down prices and hence sought to either average down on investments or else are building positions at “give-away” prices. Clearly, both equities and bonds are cheaper than they were 12 months ago. (2) Market participants, both asset managers and investors, are becoming timidly more optimistic that some form of truce from the trade war impasse could result in a more benevolent outcome for both countries (the US and China) and the global economy in general, which has led investors to put more money to work in the early stages of 2019, potentially as strategic positioning for 2019.
We must not let ourselves become too complacent or over exuberant on how the markets have performed so far this year. This is not necessarily a taste of what is to come for the remainder of the year, but merely a normalising process where markets revert to their intrinsic value. Weakness in numbers coming from the world’s leading economies, China in particular, is a cause for concern but on the other hand, the US economy continues to show its prowess through the robustness in its numbers.
The role of central banks will be more pivotal than ever in 2019 in trying to keep a lid on growth on an economy through adequate and timely interest rate hikes, and attempting to use the tools at its disposal to prevent a powerhouse such as China from continuing to report disappointing numbers.
Disclaimer:
This article was issued by Mark Vella, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.