29 Jan 2019
Quarter Report - December 2018
The December quarter was a tough one from a markets perspective as investor sentiment finally capitulated on heightened concerns regarding the impact of trade wars on the global economy, US central bank tightening, and Chinese growth slowdown. As a result risk assets sold off including local and global equities, property & infrastructure, and riskier parts of the bond segment.
Economic data, particularly in export-led countries, begun to turn down as the impact of trade wars began to take effect and fears Chinese growth may be slowing faster than previously expected. The Chinese still have plenty of ammunition in their toolkit to engineer a “soft landing”, but most remain cautious on the path in the short term.
Europe was hit particularly hard in light of ongoing Brexit issues which seemed to be heading to an impasse and potentially messy divorce from the EU. Most US economic data held up well, however, housing data was weaker on higher mortgage rates and economic growth fell, which set the scene for potentially lower economic growth in the next quarter in light of the one-time sugar hit of lower taxes and government stimulus rolling off from a year earlier.
Most of the action centred on the US central bank which flip-flopped around during the quarter in terms of their messaging to markets regarding where they are in their policy normalisation path. They did clear up most of that confusion towards the back end of the quarter where they raised rates in December, indicated that a slowdown in the path of rate rises was necessary and that any future rate moves would be data dependent, but the Governor stated that the reduction in their balance sheet remained on “autopilot”, subsequently a poor choice of words, which weren’t reflected in the minutes.
The political environment remained poor with President Trump further emboldened by the US mid-term elections which saw the Democrats take the House and Republicans remain in control of the Senate. No doubt US politics gets messier from here, but history shows equity markets do well when politics is divided. We also saw a continuation of Brexit issues, riots in France, and the Italians threatening a rather large budget deficit outside of EU rules.
All in all, plenty of negative news flow. However, underlying economic data, whilst weakened, still remains in positive / expansionary territory and recession fears appear overhyped based on plenty of leading economic indicators, all whilst asset prices look a lot cheaper than they did three months ago.
Chief Investment Officer