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Market Commentary – January 2019

14th January 2019

The Author: David Cooper

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Financial strategist, investment adviser and Sales Director for United Advisers

Yuletide volatility as world equity markets see worst December in decades

While December saw no major changes in current events around the globe, market effects during a season of traditionally thin trading markets, was to elevate volatility. Although it appears 2018 ended on an uncertain note, it’s worth bearing in mind that in the majority of cases, market volatility is still at or below the average over the past twenty years.

In December the majority of global stock markets fell, with the US, reacting to the continuing Chinese/US trade dispute, the resignation of the US Defence Secretary James Mattis, and an expected, but unwelcome, Fed target rate hike, seeing its worst December since the start of the great depression in 1931.

Meanwhile, Chinese markets reacted to the continuation of the Chinese/US trade dispute and the highly controversial arrest of the Huawai CFO Meng Wanzhou.

In Europe, market turmoil was exacerbated by political uncertainty arising from a number of political stressors including an unresolved UK Brexit, Hungary’s border razor-wire and water-canons appearing to flout EU free movement rules, EU Commission issues over Italy’s proposed budget, Germany’s falling support for Angela Merkel’s party and continued rioting on Parisian streets.

Partly the market reaction represents a barometer of investor reaction to issues that have no clear consensus over outcomes in terms of likely results and resolution dates.

Because of this inability to predict outcomes, and because markets generally fear uncertainty, share prices within a thin Market, such as that traditionally seen during December, inevitably end up reacting to every single piece of reported or rumoured news.  While this reactionary type of market response is understandable, it pays to concentrate on the underlying economic outlook for major markets rather than day-to-day ‘noise’ produced by external factors.

Although 2018 ended on an uncertain note with a number of issues affecting markets remaining unresolved, these seemingly unpredictable issues will, at some point, be resolved. There are still high levels of confidence that, with shares, particularly in the UK, looking historically cheap and offering high dividend yields, global markets continue to present profitable investment opportunities.

In Other News…

The state of Brexit

The future of Brexit is still unresolved and unpredictable. The UK Prime Minister Theresa May survived a vote of no-confidence from within her own party ahead of the Brexit parliamentary vote on 15th January.

Emerging Markets

While December was generally a poor month for equities in developed markets, emerging markets were a relatively safe haven with the MSCI Emerging Markets Index falling only 2.5%, in GBP-terms, against global markets which fell 7.0% (measured by the FTSE World in GBP-terms).

Japan

While Japanese equities fell by 10.5% in December measured in Yen-terms, losses were mitigated by a notable rally in the Yen, rising over 3.0% against both Sterling and USD.