2018 Wrap, January Optimism | Week Ahead

14 January 2019

The markets have started January in recovery mode as the US market (S&P 500) recorded its longest winning streak since September, until investors appeared to take money off the table on Friday ahead of the upcoming US corporate earnings season, which will begin with the big Wall Street banks this week.

December was a particularly trying month for US equities as the S&P 500 index saw its worst December since the Great Depression, and the Nasdaq Technology index confirmed it was in a bear market, or -20% percent below its high.
In saying that,  sentiment looks to have improved in January as US Federal Reserve Chairman Jerome Powell reiterated the US central bank can be “patient” on raising interest rates further. There have also been positive signs last week around ongoing US-China trade talks, with growing market optimism that the US and China can reach a trade deal before a March deadline.

Also dominating headlines is the partial US government shutdown which is heading into its 4th week, as President Trump holds firm on demands for the border wall between the US & Mexico, and there does not look to be an immediate resolution in sight. 
 

2018 Market Wrap – A Year of Extreme Volatility

Over recent weeks, investors have primarily been focussing on two main concerns: the prospect of an intensified tariff war between the US and China, and the potential for the US economy to slow down in 2019, particularly as the fiscal boost from Trump’s tax cuts fades away and corporate earnings growth slows. There has also been a slew of other worries, including Brexit/political stability concerns in Europe, and importantly the impact of higher US interest rates and tighter financial conditions which has been a theme through 2018.  

We will expand on our outlook for 2019 in tomorrow’s daily email, as first we take a look back at 2018:

ASX Since 2017

Most equity indices around the globe delivered negative returns for 2018 given the issues and concerns touched on above. The US market (measured by the S&P 500 index) lost -6.2%, marking the end of the worst year for US stocks since 2008, the height of the financial crisis. The ASX was down -6.9% and hit a 2-year low.  We note that on a valuation basis, the Aussie market overall looks cheap to us on a medium-term view. The NZX was the standout global market in 2018, actually up +4.6% as the defensive, dividend paying nature of the NZ market has seen NZ stocks outperform.

NZX Since 2017

Defensive sectors (such as telco’s, property and infrastructure stocks) outperformed cyclical and growth stocks at the back-end of 2018, as is to be expected in such market conditions. Volatility has exploded since October last year, and returned to markets after what was an extremely quiet 2017. As we discussed in December, we are clearly in the latter stages of what has been a long bull market since the 2008/2009 financial crisis.

All up, we see the 2018 market performance as a reset to slowing economic growth and overall earnings expectations globally as markets expect US fiscal fade in late 2019 along with monetary tightening in some major economies, as central banks reverse stimulus. The market has adjusted stock valuations lower to adjust for risks, and the question is how much has been reflected in current prices?

Once again, we will expand our 2019 outlook in a 2-part separate report tomorrow. At the current juncture, we do not foresee a catalyst for a large market crash, although volatility is likely to remain elevated in our view, until at least the middle of the year when there is likely to be better clarity around several of the uncertainties facing markets discussed above. As such, there could also potential for market rebound following a correction at some stage during the course of 2019. Opportunities still exist against this backdrop, but investors need to be more selective. While we think medium-term investors should not panic in times such as these, given the uncertainties we believe it is prudent to allocate a portion of the portfolio to cash in order to protect against down-side moves.

 
Australia & New Zealand Market Movers

The Australian share market retraced on Friday (ASX 200 index -0.36%) ending its four-day rally despite strong retail sales figures, with banks and miners weighing on the market. In terms of big moves, Costa Group shares plummeted as the fresh fruit and vegetables company announced a surprise profit warning on the back of difficult trading conditions with subdued demand in the berry, avocado, and tomato categories.
 

The New Zealand market rose on Friday (NZX 50 index -0.80%) as investors were cheered when US Federal Reserve Chairman Jerome Powell reiterated the US central bank can be patient on raising interest rates further. In the new year, Pushpay has been a strong performer, rallying as it said it achieved its target of breaking even on a monthly cash flow basis prior to the end of 2018 and is confident it will now have positive cash flows on an ongoing basis. On the flipside, Kathmandu shares were hit hard after it said the Christmas shopping period fell short of expectations.

 

3 Things Markets Will be Watching this Week

  1. US earnings season begins with big Wall Street banks announcing profits. Weak guidance from several notable companies such as Apple and Macy's have heightened the focus on US earnings growth.
  2. US politics continue to dominate headlines, with the ongoing partial shutdown of the US Government.
  3. The UK Parliament votes on Brexit on Tuesday.

 

Have a Great Day,
 

Team

We will expand on our outlook for 2019 in tomorrow’s daily email, as first we take a look back at 2018

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