Picking up the pieces from a dismal 2018

To some, the end of the year period is commensurate with being sentimental and emotional, looking back at the wonderful memories to show for in 2018. Well, this time round, not for me, not event for most investors who were exposed to the markets this year. Not only do we have nothing to show for it and come out empty handed, but we also have to deal with performances which were below what we originally thought, but more than that, a tough end to the year, with the outlook for 2019 not as rosy as one would have hoped for.

2018 (at least for me) is finally coming to an end, and the end result is worse than what we had previously envisaged. Credit spreads are significantly wider than this time last year, most fixed income sub asset classes across all the spectrum are in negative territory in terms of total returns, and the issues which characterised 2018 seem nowhere to be solved. A positive for the investor, those who have money to spend at this juncture, is that yields are higher than 12 months ago, and this means that on a risk-adjusted basis, current spread levels make more sense now than they ever did throughout 2018.

Since mid-October, the weakness in credit was a bitter pill to swallow for those investors who already were exposed to the first turbulent 9 months of the year. It comes as no surprise that during 2018, well over three quarters of all assets declined in value. With investors sitting on large amounts of cash, we could well see some recovery in asset prices in January, but after that, macro and political risks are expected to take centre stage once more.

Credit is still uncertain how to react to ongoing uncertainties from the political to the macro, to the more technical factors. The Brexit situation is still fluid. Italy’s woes are nowhere close to be solved. Hype surrounding MEP elections in Europe is gaining traction, especially with the Euro-sceptics. And we have not yet touched upon the impact the trade wars are having on the global economy and how this in turn is impacting credit markets.

What is positive is that, 2019 could turn out to be a better one than in 2018. Our starting point is clearly a handful of steps behind, so, with yields much higher today, grounds for generating positive returns in 2019 are more optimistic, though we must tread with a great deal of caution, both for European Investment Grade and High Yield, valuations appearing attractive at current levels. What is critical, is the movement in the benchmark yield, namely the 10-year German Bund. With the impasse of trade wars ongoing, we fear that this could have a marked impact on global economic activity, adversely impacting credit and equity markets and hence would not rule out central banks coming to the rescue…but we seem to be for away from that scenario, for the time being.