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We are approaching year-end, and to say that 2018 was a difficult year for markets is an understatement. Indeed, 2018 will be marked as one of the most volatile years over the past 10 years with investors’ nerves being continuously tested due to the remarkable market movements. From the foreign front, trying to find respite in a particular asset class turned out to be irrelevant as most asset classes have registered negative movements.
Usually, in instances of a risk-off mode investors tend to shift their assets into assets, which are considered safe-havens. The question to be posed is whether in 2018 there were any safe-havens around. To date, we are yet to figure that out. Apart from the local arena, whereby primarily local corporate bonds once again proved to be resilient to the foreign turmoil, other assets to-date such as sovereign bonds were also not the right niche to place assets.
In such a volatile year, equities were unsurprisingly hit bitterly, with Emerging markets (“EM”) and Europe emerging as the prime laggards. In line with the correlation principle, risky debt was also hit notably with high beta sectors, such as financials and consumer discretionary being pinched remarkably.
In a nutshell, 2018 was a year where investors were faced by a number of events, which in my opinion might have been inevitably tackled differently by politicians, which instigated fear and moments of uncertainty. As I have opined in previous writings, in my view the trade-war uncertainty was the prime factor for this year’s volatility, while other events such as the specific EM rout, Brexit and the Italian political saga were undesired additions to an already negative and beaten market sentiment.
Moving into 2019
Despite there being overall positive verbal agreements in the G-20 summit held in Argentina a few weeks ago, to date the markets still seem to be uneasy about the actual outcome of the current ongoing feud. In the first quarter of 2019, we should have a clearer picture of how the dispute will evolve.
What is a state of fact, are the current attractive valuations across selective asset classes, which in our view were heavily conditioned by a market over-reaction rather than on fundamentals. Undebatable, markets are a forward looking mechanism and this is one of the reasons why many asset prices have been pinched over the past months. Investors believe that the possible escalation of a US-China trade war will ultimately effect negatively earnings in the future. Rightly so, they are right if additional tariffs are put into force. That said, given the fact that we have seen a positive tone from the G-20 meeting we are of the view that ultimately a solution would be found.
Economists would put forward the theory in stating that in a trade-war nobody is a winner. In reality, I think this is a fair assumption, and in this regard despite the pressures, the U.S. over the longer term will hurt from an economic perspective.
Thus moving into 2019, investors should be very diligent in their asset allocation. I think given the uncertainty surrounding primarily the trade-war we might continue to experience some volatility until we will have a clearer indication on concrete outcomes. That said, possibly by not dipping at these selective attractive valuations you might miss the boat of a possible rebound on the strike of a benevolent trade-war outcome that should suit all parties involved.
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