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Market turbulence: our view

The start of December has seen a fall in world stock markets amid concerns about Donald Trump’s trade war with China and worries about slowing global growth.

Jon Cunliffe


The start of December saw a fall in stock markets around the world, as concerns about the impact of Donald Trump’s trade war with China and worries about slowing global growth in 2019 hit market sentiment. For investors, such falls are certainly unpleasant at the time but, for those with long-term investment horizons, there really is no need to panic. Fluctuations, sometimes significant ones, are normal and to be expected. Indeed, for individuals requiring the assurance of no fall in capital values the only asset class that can be considered is cash. However, over extended periods of time, history shows that equity markets generate positive returns that – unlike cash – can beat inflation, despite these short-term upsets. We remain confident that investors should be rewarded for holding a diversified, well-constructed portfolio of the appropriate risk level for their circumstances over time.

The December sell off is the third period of increased volatility that we have faced this year following the February/March pull back and the October market rout. The FTSE 100 is now down more than 10% in the year to date. Growth in output world-wide in 2018 has been above the trend line and, earlier this year, equity markets were supported by share buybacks following corporate tax cuts by the Trump administration and good earnings growth. However, the bull market has been supported by gains in the technology giants – and these companies have faced difficulties over the last few months.

There were hopes that a resolution to the trade dispute had been found at the end of November when, following a dinner at the G20 meeting in Argentina, the US and China agreed to halt the introduction of additional tariffs on each other’s goods to allow trade talks to continue. But discrepancies over when that truce would begin and conflicting reports from both sides have led to confusion. 

The dispute with China launched by Donald Trump is starting to reduce global trade. At a time when we are seeing a slowdown in many important global economies after a bumper year of growth in 2017, there are fears that the trade issue could hit the world economy in 2019. This comes at a particularly important time, as the US is raising interest rates and reducing its quantitative easing measures and the European Central Bank (ECB) is easing back on its own programme to support markets. The ECB plans to halt its bond-purchasing programme in December. The pound has also been hit by confusion over what the final deal will look like when the UK withdraws from the European Union.

Another major trigger for recent market corrections has, counterintuitively, been strong data and economic progress in the US. This has led to expectations of faster interest rate rises in the country, which pushes bond yields higher. This means the return from US government bonds is becoming more attractive, which is a negative for equity markets as some investors switch to bonds. Rising rates also makes the level of interest that companies have to pay on their borrowings rise, which can be a drag on profitability if a company has significant debt. However, we sense that higher US interest rates are beginning to slow the US economy and expect a less aggressive path of interest rate hikes as we head into 2019.

When the stock market is suddenly headline news, which it inevitably is during falls but rarely, it seems, during rises, taking a step back can be difficult. However, the right course of action is to decide whether anything has fundamentally changed in your investment rationale. 

The current theme embraced by the equity bears is that the nine-year long, economic (and market) cycle is long in the tooth and therefore about to come to an end. We would argue that cycles don’t die of old age but end because of overheating – in essence, too much froth in the economy or too much exuberance in markets. It’s not obvious to us that the global economy is running too hot – inflation is generally at or below levels central banks would like to see and the global economy is likely to grow at a moderate pace next year; elsewhere, financial markets have not been imbued with the type of euphoria which is generally seen before a prolonged downturn. It’s also important to note that the recent market slide has been narrative based (trade war fears) and not fundamentals based. Corporate earnings growth in the third-quarter remained upbeat.

We would argue, therefore, that there is scope to be optimistic on stock markets, particularly given lower valuations. However, we need to remain vigilant and the two things we are keeping a close eye on are the outlook for corporate earnings and the stance of the major central banks, as a deterioration in the former or a more hawkish stance of the latter is likely to prove more food for the bears. 

As a rule, and whatever the short-term view, panic selling into falling markets can exacerbate losses because if you intend to reinvest you may compound the problem by missing a bounce back up. It is often wise to be a spectator rather than a participant in trading at times of high volatility.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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