Global Market Background – December 2018

After sharp declines in October, global equity markets struggled to regain ground in a month dominated by political uncertainties. The MSCI World Index returned 1.2% in November as investors followed the unfolding Brexit drama, US mid-term elections, Italy’s budget standoff with the EU, and the latest developments in US-China trade relations. An eventful month also saw oil prices slump by 22% and the US tech giants take a hit on weaker growth prospects for 2019.

The UK’s FTSE All Share Index ended a volatile month with returns of -1.6% as Brexit negotiations entered a key decision phase. The UK government and EU leaders approved a Withdrawal Agreement and a Political Declaration outlining a framework for the post-Brexit relationship. However, a flurry of ministerial resignations amid cross-party criticism raised doubts over whether Prime Minister Theresa May can win support for the deal in parliament. There remains considerable uncertainty over what could happen if MPs reject the agreement, with a ‘no deal’ Brexit, a second referendum, or no Brexit all possible scenarios. Moreover, a defeat for May could trigger a vote of no confidence in her leadership or even a general election. This uncertainty has investors on edge and key announcements or decisions could provoke further swings in local currency, equity, and bond markets.

Aside from Brexit, European investors also digested another destabilising deadlock between the EU and Italy. The recently-elected populist government in Rome has resisted demands by the European Commission (EC) to adjust its budget proposal for 2019. The prolonged standoff weighed on investor sentiment during November, when the regional Euro STOXX benchmark returned -1.1%. The underperformance also reflected signs of weakness in the regional economy, with Eurozone growth disappointing in the third quarter. A 0.2% quarterly decline in the German economy – the first contraction in three years – increased concerns about the impact of softer global trade on regional activity. Falling confidence and weak manufacturing data, combined with lower inflation, have the market questioning whether the European Central Bank (ECB) will push ahead with monetary policy normalisation in 2019.

The US S&P 500 Index did bounce back in November to post moderate returns of 2.0%, though tech stocks continued to struggle. The so-called FAANGs (Facebook, Amazon, Apple, Netflix, Google) have lost more than US$1 trillion in value from the highs posted earlier this year. In the mid-term elections, the opposition Democrats recovered a majority in the House of Representatives while Republicans increased their hold on the Senate. The result was widely expected and investors looked mostly favourably on the relative political certainty that Congressional ‘gridlock’ offers.

At the same time, the outcome reduces the likelihood that the government can approve a new fiscal stimulus in 2019, raising expectations of a slowdown in economic activity. The Federal Reserve left interest rates unchanged in November but US stocks received late boost as Fed Chairman Jerome Powell’s comment that interest rates were “just below neutral” hinted at a slower pace of monetary tightening ahead.

In a rough year, the MSCI Emerging Markets Index returned 3.0% in November, aided by news filtering through of a ‘ceasefire agreement’ in the US-China trade war at the G20 Summit. Hong Kong’s Hang Seng Index outperformed with monthly returns of 6.2% but China’s Shanghai Composite benchmark returned -0.6% amid lingering fears over trade and economic activity. Most emerging market equities remain deep in the red for 2018.

All figures total returns in local currency, unless otherwise stated.