Global share markets managed a very positive start to 2019 with the MSCI World Index returning an impressive 7.1% (in local currencies).
US shares were a key driver of the strong returns from global share markets. The S&P500 was up 8% when dividends were included. The key driver of this robust result was the swift reversal in rhetoric from the US Federal Reserve and of course the sell-off in share markets at the end of 2018.
The FOMC raised rates four times in 2018. While this was in line with the market’s expectations the forward-looking commentary at the December meeting was more hawkish than expected. The dot plots indicated that the Fed’s Committee expected two more rate rises in 2019 and the unwind of the Federal Reserve’s balance sheet was said to be on ‘autopilot’.
It is of limited surprise that a number of commentators argued that Federal Reserve Governor Jay Powell backed down to market pressure when a couple of weeks later in a speech to the America Economic Association, he raised the possibility of a pause and indicated that the unwind of the balance sheet would not occur irrespective of economic conditions.
The reversal was completed at the FOMC meeting at the end of January where the dots plots indicated Committee members did not expect further rate rises in 2019 and Powell stated that the raising cycle was on hold until data confirmed further raises were required.
One interpretation of the Federal Reserve’s commentary over the past few months is that stronger financial markets will see more hawkish language and weaker markets will see more dovish language. This strengthens the argument that the market is likely to be range bound in 2019, barring any shocks to the up or down-side.
Eurozone equities also contributed to the strong performance of global share markets. The Bloomberg European 500 Index was up 6.5%. This performance was particularly impressive given the lack of progress made to resolve the Brexit impasse. In mid-January, the UK parliament rejected Theresa May’s deal with the Europeans with a majority that had not been seen in 8 decades (432 to 202). This result was more extreme than even the most pessimistic projections and rumours.
A few weeks later a modest majority (317 vs 301) supported an amendment that May should return to Europe and negotiate a new backstop agreement. The only other successful amendment was that the UK should not leave the EU without a deal. While this amendment was advisory and has no legislative force, it provided the markets with some tangible evidence that the UK politicians were keen to avoid a no-deal Brexit.
The modest majority and comments made by British MP’s that had apparently supported the amendment, raised doubts whether Theresa May would be able to get an amended deal through parliament if the Europeans altered the backstop.
The Europeans were clearly unimpressed. Rhetoric was at best not encouraging, with the Europeans arguing that the deal was good, that it was designed by Britain and that they would not reopen negotiations with May. With little more than two months before Britain was scheduled to leave the EU any workable compromise looks to be a long way off. Forget about actually implementing it. All this while the drums beat louder for a second referendum…
The strength in the sterling and FTSE 100 share market index suggests that the market does not expect a no-deal Brexit. A delay looks more likely given the time required to agree a compromise and then implement the deal. The uncertainty is starting to have a real impact on the UK economy, with recently released data showing the UK grew at its slowest pace in six years in 2018.
Emerging Markets (EM) equities also enjoyed a strong start to 2019 with the MSCI EM Index returning 7.1% in January in local currencies. These share markets are exposed to US monetary policy, because of the propensity for individuals, companies and even governments to have US dollar-denominated debt. Consequently, the change of tact by the US Federal Reserve Chairman Jerome Powell, and hopes that the tightening cycle may have concluded was particularly welcome news for emerging markets investors.
Chinese equities had a strong start to 2019 but lagged other markets. The Shanghai Composite ended the month up 3.6%. News of a more dovish US monetary policy and progress on trade talks was partially offset by mixed news from companies.
Over the ditch, Australia also lagged other markets. Arguably, this was to be expected because the “lucky country” avoided the pullback suffered by most share markets in December. The ASX 200 Accumulation Index increased by 3.9%. The move higher was very broad with the financial sector the only sector not to contribute positively. No doubt speculation on the upcoming final Royal Commission Review report weighed on the sector. A strong oil price ignited energy stocks which were up 11.5%.
Back home and the NZ50G Index notched up a 2.0% gain making it the weakest performing market that we follow. The performance was certainly not helped by a couple of domestic cyclical stocks (Air New Zealand and Kathmandu) downgrading earnings and some weak economic statistics raising question marks over future economic growth.
