A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to & view previous editions at: http://blogs.deloitte.co.uk/
Last year was a tough one for investors, with global equity markets falling 10% overall. For UK investors most major asset classes – equities, bonds, and residential property – either fell in value or saw only small gains.
The cheap money and optimism that helped drive strong returns for investors in 2016 and 2017 was in short supply in 2018.
Global equities peaked in late January of last year. Since then euro area and emerging market equities have been on a downward path.
The US initially shrugged off the downturn. By late August the US equities hit a new milestone, recording the longest continuous bull market since the War. The US rally was powered by the strong performance of a clutch of tech giants and the sugar rush of Mr Trump’s tax cuts at the end of 2017.
But the seemingly unstoppable US bull market hit a brick wall in October. Since then it’s been down, with the S&P 500 dropping 9% last month, its worst December since the Great Depression.
Investors fear that rising US bond yields and slowing global growth mean the best is over for equities. Interest rate rises in the US, and an unwinding of quantitative easing, have pushed up yields, or interest rates, on US government bonds close to a seven-year high.
Higher bond yields hurt equities by depressing the current value of future dividend income and slowing economic activity, and profits.
All major developed economies’ equity markets finished 2018 in negative territory. The worst performer was Greece, down 22%, with China down 20%, and euro area equities down 17%. The US was the best performing major stock market, despite a 5% overall decline. The UK, despite Brexit worries, did rather better than most major, recording a 9% fall.
Emerging market assets have seen an abrupt reversal of fortunes. After rising 27% in 2017 they fell by 10% in 2018. Higher US interest rates have sucked capital out of emerging economies and back to the US, hitting demand for emerging market assets. Protectionism is especially bad for export-dependent economies such as China. Home-grown problems in a host of emerging economies, from Russia, to Argentina, Turkey and Iran have added to investors’ worries.
The world looks a rather risker place than it did a year ago. US growth looks close to a peak. The momentum of growth is slowing in emerging markets and the euro area. The VIX Index, a measure of US equity price volatility called the ‘fear gauge’, ended last year close to a three-year high. Caution and volatility are the watchwords.
Within the equity market investors have sought to protect themselves by shifting into defensive stocks. Cyclical equities, such as construction and travel and leisure, generally fared poorly last year. More defensive ones, such as utilities and health care, proved a better store of value.
Higher interest rates and the prospect of slower growth have hit bank shares hard. In western markets banks substantially underperformed falling equity markets. Greek and German banks were the worst hit, halving in value last year.
Among the ‘FAANG’ technology stocks only Netflix and Amazon delivered significant returns last year, up 39% and 28% respectively. The other constituents – Google, Apple and Facebook – sold off.
2018 was also tough for commodity investors. The S&P/Goldman Sachs commodity index fell 15% following a sharp fourth quarter decline. Fears over slowing global demand hit metal prices, with base metals, those typically used in construction and heavy industry, being hit hard.
Oil prices fell 15% in 2018 and are down by a third from their October peak of $85 per barrel. US shale production surged in the fourth quarter of last year and higher than expected output elsewhere and fears over global demand have depressed prices.
Investors have responded to greater uncertainties by shifting into government bonds and cash. 2018 wasn’t a great year for bond investors, with investors in the US, euro area and UK markets just about breaking even. But at least they didn’t lose money.
The glory days for residential house prices in the UK seem to be past, with prices edging up only slightly in 2018.
In currency markets the big story was dollar strength. It was up 7% on a trade-weighted basis, making strong gains against emerging market currencies.
By and large major asset classes didn’t do well in 2018, but some obscure investments did.
Canada became the second country to legalise the use of marijuana and, in doing so, created a surge in the number of licensed producers. One Canadian company, Tilray, became the first to go public in the US, listing on the Nasdaq. The IPO priced the shares at $17 in July, rising to over $200 before closing the year at $70.
Burgundy prices rose 35% in 2018, the best performance in 10 years. Two bottles of Romanee-Conti broke the record for the most expensive bottles of wine ever sold at auction. The first bottle of the 73-year old French Burgundy sold at Sotheby’s in October for $558,000, 17 times its original estimate. Another bottle of the same wine sold for $496,000 minutes later.
The price of permits to emit carbon dioxide in the European Union more than tripled in value in 2018. Changes to the Emissions Trading System means much of the excess supply, which has kept prices low since the financial crisis, will be taken out of the market in 2019.
One unconventional asset which has hit hard times is Bitcoin. It was the star performer of 2017, rising ten-fold in value. Last year was different. Bitcoin ended the year at $3,835, down 63% from the beginning of the year. In its short life Bitcoin has failed to provide a stable store of value that is seen as a key characteristic of durable currencies.
Investors enter 2019 in cautious mood, looking for safer alternatives to equities. Sentiment is the mirror image of where it was a year ago, at the start of 2018, when investors were upbeat and looking forward to further gains.
A cynic – or a contrarian investor – would argue for doing the exact opposite of what most investors are doing today. As the great British banker, Nathan Meyer Rothschild is supposed to have said, “Buy when there’s blood in the streets, even if the blood is your own.” After last year’s falls in equity markets there’s certainly “blood on the streets”. It remains to be seen whether investors are confident enough to buy.
