Global Market Background – November 2018

A volatile month ended with heavy losses for global equities. The MSCI World Index returned -6.8% as investors turned more pessimistic about the outlook for growth amid risks from monetary tightening and the US-China trade war. Emerging markets again took a hit, with the MSCI Emerging Markets Index returning -7.8% on the month and -12.1% in the six months to end-October, as a strong US dollar and fears of a China slowdown fuelled negative sentiment.

The UK’s FTSE All Share index returned -5.2% in October as global volatility and ongoing Brexit uncertainty weighed on performance. As Brexit talks reach the end-game, a deadlock over the Irish border remains the key obstacle to reaching a withdrawal agreement. A high-level EU summit in October failed to deliver a breakthrough, though at the end of the month Brexit Secretary Dominic Raab suggested a deal would be finalised in November. Meanwhile, no deal contingency planning accelerated and S&P Global Ratings warned that such a scenario would tip the UK economy into a deep recession.

Recent data releases were encouraging, however, as UK growth hit 0.7% in the three months to August while wage growth reached a ten-year high of 3.1% over the same period. Chancellor Philip Hammond delivered an expansionary “end of austerity” budget at the end of the month, though admitted that it assumed a smooth withdrawal from the EU. The Bank of England (BoE) held its basic rate at 0.75% while warning that inflation was likely to remain above target for at least the next two years. At the same time, Brexit uncertainty continues to undermine the case for further tightening and markets are not anticipating another hike before the end of the year.

There were more concerns for the Eurozone economy as regional growth slowed to just 0.2% in Q3. The Italian economy stalled as the new government continued to spar with Brussels over plans for a fiscal stimulus. In an unprecedented move, the European Commission rejected Rome’s proposal for a sharp increase in spending, requesting a revised plan in November. Heightened political tensions contributed to a negative return of -6.6% in the regional Euro STOXX benchmark index.

The S&P 500, which has outperformed during 2018, also experienced volatility and losses in October, ending the month with returns of -6.9%. This came despite further indications of economic strength as annualised growth came in at a preliminary 3.5% in the third quarter, while wage growth hit the highest level since 2009. At this stage of the economic cycle, investors increasingly take positive economic news as a sign that the Federal Reserve will raise interest rates faster or more than expected. The outlook for corporate earnings also weakened as companies warned of higher costs amid growing threats to global trade.

China led the decline in emerging markets with the Shanghai Composite index returning -7.8% on fears that a domestic slowdown was worsening due to the trade dispute between Beijing and Washington. The IMF cut its forecast for economic growth in 2019 citing “recent tariff actions” as the latest data pointed to further weakness in the country’s manufacturing sector. Other Asia-Pacific markets also tumbled, with the Hong Kong Hang Seng index returning -10.0% and South Korea’s KOSPI composite -13.4%. Brazil was the main outlier of the month with the Bovespa index returning 10.2% as pro-business candidate Jair Bolsonaro triumphed in a tense presidential election. After cheering his victory over the Workers’ Party of ex-president Lula, investors will now be looking to see if he will deliver on promises to reform Brazil’s economy.

Our more defensive positioning in portfolios made over the last 12 months has helped limit negative returns in the year to date and the introduction of more managers with varying styles and outlooks should help returns in more volatile periods such as these.

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