Global Market Viewpoints: Fourth Quarter 2018Submitted by Castlebar Asset Management on January 14th, 2019
The 4th quarter saw global stock markets sell off into bear market territory. The sell off was triggered by concerns over the US – China trade war and the ripple impact it is having in economies around the world. Economic growth decelerating at a quicker pace than expected. The slowdown is partially linked to the cautious business environment stemming from the trade war. There are also one off local events in each region which are causing investors and businesses to proceed more slowly. Currency markets did work against US investors with the US Dollar finishing the quarter slightly higher.
This quarter we built up the cash holdings in your portfolio. We sold AerCap Holdings. This company buys airplanes and leases them out to airlines and freight shipping companies around the world. The stock had been a good performer but given some renewed concerns around the macro economic landscape we thought it was best to take profits in the stock. Only one stock had a positive performance this quarter in the portfolio. Smith and Nephew, the UK based medical device company, squeezed out a gain of 0.77%. The other top performing stocks in your portfolio for the quarter were BCE (-2.4%) and Sanofi (-2.8%).
European economies continue to miss the mark when it comes to growth. In the past, it had been nations outside of the core of Europe that were missing expectation. Now it is France and Germany. In France, the “yellow vest” protests have caused a slowdown in business activity, although the trend was heading lower prior to the protest. In Germany, one off problems around car makers implementing new emission regulations in the quarter hurt the economy. Trade tensions with China have not missed Europe either. China is a significant trading partner with many in the EU. The European Central Bank (ECB) announced they are ending their quantitative easing program. The ECB purchased about EUR 2.6 Trillion in bonds to help stimulate asset prices. This will be the first step towards normalizing monetary policy in Europe.
Brexit remains a significant unknown for investors. The UK and EU have reached terms for an exit deal but the British parliament has not voted on the deal. In March 2019, the UK is scheduled to leave the EU, with or without a deal. If they leave without a deal it would likely lead to a recession in the UK. There are still many outcomes and scenarios that could take place, including a new referendum on Brexit. This is something to monitor closely in the first few months of the new year. Political leadership in Britain continues to be suboptimal which has made this process particularly drawn out.
Given all of the uncertainty in Europe, we are cautious on their markets. There are some positive points to keep in mind. Valuations are attractive relative to other markets in the world. Earnings growth is expected to be positive in 2019. Investor sentiment is quite low which can serve as a catalyst for contrarians to step in.
Japan is caught in the middle between the US and Chinese trade dispute. The soft economic growth in China is having an impact on certain exporters in Japan. Japanese companies supply components to Chinese firms and are key participants in the global supply chain. Overall, we are optimistic about the Japanese market. The market has an attractive valuation, lower energy prices help the economy and earnings growth is expected to outpace the US and Europe. Companies are generating a record level of cash. They are increasing their dividend payouts and starting share buyback programs.
One concern entering 2019, is Japan is going to increase their consumption tax. This is a political hot potato but something they need to do to balance their government budget. The tax will increase from 8% to 10% in October 2019. This usually causes some market volatility because it does pull consumption forward a few months followed by a spending lag once the higher rates are in place.
Canada, Australia & Asia
Canadian markets were the weakest developed market in the quarter. The 38% selloff in crude prices directly impacted stocks in Canada. Australian markets were under pressure because of concerns over weakness in China, weak performance from banks and fears of a housing slowdown. Australia’s housing market has been robust and a bright spot for many years. Concerns that is has become overvalued are starting to impact the financial sector. We remain underweight in Australia given this issue. Other Asian markets held up better than most markets despite Chinese growth concerns.
The currency markets remained relatively quiet again this quarter. The US Dollar did gain against a basket of global currencies. The Japanese Yen gained about 3% in the quarter. This currency is viewed as a safe haven during uncertain periods in markets. The Federal Reserve (Fed) raised rates which help lift the US Dollar. The Fed is expected to keep steady for some time while there is growing expectation that other central banks will start to raise rates in 2019. This should help other currencies strengthen in 2019.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.