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Monthly Market Commentary - December 2018

Jon Cunliffe, Charles Stanley Chief Investment Officer, offers his monthly market commentary

Jon Cunliffe

in Fiduciary news


After a torrid October, financial markets performed somewhat better in November, with the MSCI AC world equity index returning 1.4%. As has been the pattern for much of the year, US equities outperformed those in Europe, the UK and Asia. The UK equity market was particularly weak, reflecting price declines in the energy and materials sectors to which it has a significant exposure.

A notable development during the month was a significant decline in US Treasury bond yields, which saw the ten-year note rally to below 3% for the first time since mid-September. This was on the back of guidance from the Fed Chairman Jerome Powell that the point at which US interest rates may reach the key neutral rate may be lower than previously indicated. As a result, the market is a little more optimistic that the Federal Reserve may take into account evidence of recent weakening in the interest rate sensitive parts of the US economy (notably housing and business investment) and may temper future rate rises.

This apparent policy shift has also taken away some of the market’s enthusiasm for the US Dollar and has helped ease financial conditions in Emerging Markets, which rallied 4% over the month on expectations that potentially less-aggressive Fed policy will not cause the type of disruptive capital flows out of Asia and Latin America seen earlier in the year. Against this background, the upcoming Federal Reserve policy meeting on 18/19th December will be an important event for financial markets.

Another important event was the announcement by the US administration that it would delay the imposition of additional tariffs on Chinese imports by three months and an apparent decision by the Chinese authorities that they would lift tariffs on US auto imports. In the meantime, there was an agreement that the US and China would engage in comprehensive talks aimed at achieving a detailed agreement on bi- lateral trade.

Elsewhere, there was an apparent agreement to deal with the contentious issue of the Chinese use of US intellectual property rights in the tech sector. Whilst the market has taken this positively, there remains a healthy degree of scepticism about whether both sides can indeed resolve their differences.
Looking into 2019, we expect global economic growth to be a little weaker than the past two years. Tighter central bank policy and the maturity of the business cycle raise the risk that activity levels may slip a little below trend. However, this is likely to be a better outcome than that implied by the current pricing of financial markets, which currently discount a 35% chance of a US recession. Over the last twelve months, equity valuations have fallen significantly, with earnings multiples in many markets – in particular Asia and Japan –

The value of investments, and any income derived from them, can fall as well as rise and investors may not get back the original amount invested. Past performance is not a reliable guide to the future.

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