Reflect & Prepare (End of year special)

Friday, 21st December 2018 14:54 - by Reflect & Prepare

Dominating the US this week has been sell-off in the equity markets with the focal point this week being the FOMC - who chose to hike rates again despite weakness in the stock markets.  Market participants had warmed to the idea that the Fed would do well to stand pat this time around, but in this world of forward guidance, excessive reactions perhaps dictate that central bankers stick to 'their word' and pass through what market have priced in.  Indeed, a downward revision in the dot plot was also priced in, but the reaction of the stock markets was clearly that of disappointment as it seems they have not reined in their tightening bias enough.   

The Fed is now expected to tighten twice next year, with previous calls for 4 now marked down swiftly as the US data starts to show signs of deceleration, though, in comparative terms, the US economy is still head and shoulders above the rest of the world.  China is undergoing a slowdown and the European recovery last year seems to have fizzled out, though, for investors in the US, the higher rate environment is taking its toll with fears of a slowdown naturally putting valuations into perspective.

Politically, a US government shutdown now looks to be on the cards as president Trump stamps his foot on his insistence of $5bln of funding for the border wall.  The Democrats are not giving ground, so the political stalemate is also proving to be unsettling for investors, though previous episodes have eventually found resolution.  

After delaying the meaningful vote last week, the UK PM has been busy with her cabinet making plans for a no deal Brexit come March next year.   Despite the one majority that is clear in the House of Commons - that of avoiding a withdrawal without some kind of deal - contingency plans have been discussed.   The PM continues to argue that the only way to avoid a no deal scenario is to vote for the deal in place, so it is no surprise that she is coming under fire for trying to blackmail parliament into backing her deal, with the decision to delay the vote until 15th Jan seen as another ploy to crank up the pressure on members of her own party as well as the opposition and the DUP.

As it stands, she still has limited backing for the deal, and an emergency debate on avoiding a cliff edge Brexit has brought us no closer to see how this can be achieved if the EU proposal is voted down next month.  Opposition MPs and the SNP continue to insist on a second vote, but this is still being consistently shot down by the PM and some of her cabinet/spokesman.  Others - such as Amber Rudd - seem to be open to the idea. Christmas will be a busy period for the PM!

Movers and Loser

Retail names - Debenhams etc have had a hard time this year as sentiment on the high street has hit a serious low point. Mike Ashley has been verbal on the subject calling for landlords to drop rents and the Gov. to do something about business rates. This is one to watch next year as the Gov. have stated they may look at taxing online retailers more in a bid to help the high st. 

Commodities names - Oil, copper, and gold have all had their troubles this year and it seems like there is some kind of rotation taking place. Oil was the first to rally as OPEC stepped in to prop up the market by cutting supply. Now we are at the end of the year it seems the US Shale boom has put prices under pressure yet again. Now the US are the largest oil producer in the world and Russia and Saudi Arabia are being forced to cut in order to protect their economies. Copper has been a mixed bag as the Trump inspired rally came to an end. This time the US presidents antics hit the industrial metals as we started a trade war with China, among other countries. This slowed down global GDP and copper moved south with it. Gold producers are having a strong finish to the year as the risk off tone in the world is pushing the precious metal higher. 

Financials - The banks are still finding it hard to cope with regulation changes and low-interest rates. Traditional banking has become more of a focus in recent times as trading desks have closed. Analysts have also been suffering as MiFiD ii was introduced, in the UK Brexit is putting the industry under pressure as some major firms are leaving the city to head for Frankfurt and Paris. 

Troubles for corporate service providers - Capita and Carillion had a disastrous year it seems economy of scale leads to excessive behaviour and in some cases too big to fail. Governments never seem to learn their lesson when it comes to service providers. If they spread their risk over smaller businesses it would probably help the economy and reduce issues with companies like Carillion who squeeze workers and increase bonuses. 

Pharma names - Definitely the comeback kids of the year. Sector consolidation and recovery from losses leading into the US election has led Pharma investors to big gains this year. Hikma is up 47% while AstraZeneca rose 19% as the war on drug companies seemed to fade away. 

What to look out for next year

Brexit - Domestic issues continue to hit UK companies and in March we are set to leave the EU it all seems to come down to a deal or no deal scenario at the moment.

China - Chinese data seems to be turning negative, trade wars are hitting the nation and the Shanghai Comp. has taken a battering. This week the PBoC has said they will support markets and the Gov. has indicated it will keep spending on infrastructure but any major crash in markets or a recession will be felt the world over. 

Central bank policy - UK's path seems to be tied by Brexit but over in the States, it will be key to see if the Fed keep hiking choking equity markets. They have indicated 2 hikes for next year but I think that is optimistic if the data starts to turn sour. At the ECB some analysts are noting that there may not be hike next year, even though the ECB has stated they are going to do so in the summer of 2019 on many occasions. With the BoJ, it all comes down to tapering. Are the BoJ going to reign in the ultra-loose monetary policy?

Global recession - There seems to be a serious risk of multiple economies going into recession. We are watching events closely and the GDP rates in the major economies look stagnant while debt levels keep ballooning. 

Thanks for following us this year and have a great festive period!

Kind Regards

Rajan Dhall

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.