Global Market Background – January 2019

There was little festive cheer for equity investors in December as major indices across the globe suffered heavy losses. The MSCI World Index returned -7.8% on the month amid fears of slowing global growth, further US-China trade tensions, more Brexit uncertainty, and another Federal Reserve rate hike. The year-end slump took some leading indices into bear market territory relative to their late-September highs, while most benchmarks ended 2018 with negative annual returns.

The UK’s FTSE All Share index returned -3.8% in December as Brexit-related uncertainty continued to weigh on the business and investment climate. A parliamentary vote on Prime Minister Theresa May’s Withdrawal Agreement was suspended at the last minute due to a lack of support among MPs, generating chaos just a few months before the UK is due to leave the EU. May subsequently survived a Conservative Party confidence vote and rescheduled the meaningful vote for January. However, all options, from a no-deal Brexit to no Brexit at all, remain possible as Parliament reconvenes in the new year.

After a brief summer upswing, the British economy started to slow in the final quarter, with economic growth hitting 0.4% in the three months to October. Business confidence slipped to the lowest level in 18 months and growth in the crucial services sector stalled as fears of a no-deal Brexit increased. Accountancy firm PwC said that the UK economy could be overtaken in size by France and India in 2019. Against this weakening backdrop and a fall in inflation to a 20-month low of 2.3% in November, the Bank of England (BoE) held its key interest rate at 0.75%.

The Euro STOXX regional benchmark returned -5.7% in December as the closely-watched Eurozone Purchasing Managers’ Index (PMI) pointed to an economic slowdown. Violent protests in France, weakness in Germany’s industrial sector, and broader concerns about Brexit and global trade all weighed on sentiment. There was an important breakthrough as the Italian government reached a budget agreement with the European Commission, removing the threat of sanctions in the short term. The European Central Bank (ECB) put an end to its EUR2.5trn quantitative easing programme, though held its policy rate at 0% and warned of rising downside risks to the regional economy.

In the US, Wall Street suffered its worst year since the financial crisis as investors fretted over the maturing economic cycle, tensions with China, and the Federal Reserve’s monetary tightening. The S&P 500 delivered a monthly return of -9.0%, the worst December result since the 1930s, and experienced extreme volatility during Christmas trading. The Federal Reserve hiked rates by another 0.25% despite opposition from President Donald Trump, and though it signalled a slower pace of tightening in the coming year, markets had been expecting a more dovish shift in policy. Earlier in the month, the arrest of Chinese Huawei executive Meng Wanzhou in Canada at the request of US authorities had triggered a sell-off as investors feared the incident would jeopardise the US-China trade ‘truce’ agreed at the G20 Summit.

China’s Shanghai Composite index closed December with monthly returns of -3.6% and annual returns of -24.6% as the trade spat with the US added to deepening concerns about a slowing economy. These fears weighed on other Asian markets, with Japan’s TOPIX returning -10.2% amid an exodus of foreign investors.

The broader MSCI Emerging Markets Index returned -2.5% on the month, ending a difficult 2018 with annual returns of -9.7% as increased volatility and a strong US dollar reduced investor appetite for riskier assets. Brazil’s Bovespa index was an outlier, recording a positive annual return of 15.0% on the dramatic election of right-wing populist Jair Bolsonaro.