Global Markets to 24 December 2018
- Sentiment on the global equity markets remains fragile as the end of the year draws near.
- Continuing concerns over a slowdown in global growth, US monetary tightening and now President Trump’s face-off with Congress are unnerving investor sentiment.
- The Federal Reserve Bank votes unanimously to raise interest rates by a further 0.25%, while the Fed chairman delivers an upbeat assessment of the US economy.
- The NASDAQ Composite Index falls into bear market territory, tumbling a total of 20% since its August peak.
- On the commodity markets, the price of Brent Crude oil falls to its lowest level for more than 15 months.
- Although the markets have started to price in a slowdown in global growth and tighter liquidity conditions, there is still potential for 2019 to deliver respectable growth and investment returns for investors.
Global Market Summary
This year has proven challenging for both financial markets and for those who invest in them. And with potentially further weakness in global growth, it is difficult to see how risk assets can gain any real impetus over the coming months. A flurry of negative sentiment has swept across the marketplace… an epidemic bringing with it a deluge of uncertainty followed by a huge rise in volatility. The resulting stock market correction has led to many exchanges falling into bear market territory.
Since the financial crisis a decade ago, global equity markets have trebled in value. So understandably, if we see any signs of deterioration in the global economy or evidence of the central banks introducing monetary tightening, the result is likely to be some measure of despondency and profit-taking in the short-term.
In times such as these, however, it is worth remembering that history tells us that global equities deliver a far superior return over the longer term, more than mitigating against the destructive falls associated with a bear market. Those investors who accept that changes within the investment cycle create periods of joy interspersed with periods of anxiety will be rewarded for their patience.
We are expecting global growth to moderate in 2019, and for markets to continue to price in a global slowdown, as well as tighter liquidity conditions. However, recent falls on the global equity markets and cheaper valuations are gradually creating opportunities to buy back into high-quality stock.
This does not mean that everything will recover from these recent falls. Indeed, we are slowly shifting from a decade of quantitative easing to a period of quantitative tightening. This means that you will need to focus much more on your bottom-up research and select stocks and bonds with stronger fundamentals that will prove more resilient to changes in economic and market conditions.
Similarly, we are witnessing dramatic shifts in global demographics and the consequences of disruptive technologies. These technologies are changing the way people live and the way in which we look at the investment world: many flourishing businesses embracing these changes will become the new corporate gorillas of tomorrow, while those that refuse to do so could founder.
Disruption in all its forms – technological, political, economic and monetary – will continue to be a source of uncertainty and sometimes even panic across the global stock markets: all the turmoil of 2018 generated both financial rewards and disappointments.
Markets will be driven by change, which sometimes means that positive fundamentals (such as strong corporate profitability) are disregarded. Or they can be positively affected by an encouraging statement. Nevertheless, we continue to believe that we can expect reasonable results from global equities – better than those generated by bonds or cash. They may be less impressive than in recent years – given the longevity of this bull market. But they will still be acceptable.
Building a resilient portfolio, favouring a quality bias through companies that have high levels of cash on their balance sheets, a sustainable free cash flow and the ability to grow independently of the current economic cycle should provide sensible risk-adjusted returns over the longer term. We therefore see the recent correction in global stock markets as an opportunity to re-evaluate and gradually buy into weakness, rather than selling into strength. Those who are patient should be rewarded with longer-term wealth creation.
The Lowdown will be back in the new year from Monday, 7 January.
Please note that the Investment Quorum offices are closed for the festive period from Monday 24th December to Tuesday 1st January 2019. In case of emergency, please contact Petronella West, CEO, on +44(0)207 337 1390.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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