Page 17 - Taking Stock 22 Summer 2019

Summer 2019 Taking Stock Themes and strategies for 2019 WORLD EQUITIES CHRISTMAS SALE As expected, the last quarter of 2018 proved to be a dif cult period in terms of retaining any positive global asset returns for the year. Having shown uncertain direction through to September, global equity markets turned decidedly weaker in October and this accelerated savagely in December. In place of the traditional ‘Santa Claus’ equity rally in developed markets, the nal month of 2018 saw a widespread bout of panic. This resulted in the weakest December month for returns since 1931, and more than erased any positive returns accrued by most markets for the year. In contrast to past major global equity panics, the New Zealand market proved the exception, and closed the month unchanged. However, for all the major international markets the weak December return compounded the year’s downward trend. Even the resilient US S&P 500 nally capitulated, with a 9% December- month fall, which pushed the US market to a 4.4% 2018 decline. Measured from the markets’ peaks to their late December lows, several countries in fact touched -20% falls which quali es as going beyond a correction to the borderline of bear market conditions. INVESTORS UNDULY OPTIMISTIC ON BONDS Before December’s market turmoil broke, markets were expecting two additional quarter-percent US policy rate increases next year, taking the Federal funds rate to 3.0%. The uncertainty around the path of interest rates has been a clear factor in upsetting sentiment, not helped by the US President criticising the conduct of the central bank and applying political pressure to the Fed’s Chairman. Markets are now pricing in no additional 2019 increase in interest rates. We see this as unduly optimistic and even wishful-thinking with respect to how they have interpreted comments from senior US of cials. While US interest rate decisions will become more nuanced this year, there is still substantial momentum in the economy and stimulus is coming on both through the expansionary monetary policy and the various scal boosters. On that basis, we continue to believe bond yields have once again become too low, given rising US price and capacity pressures and deteriorating US debt levels. !BACK TO FEATURES 17