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Reflecting on January

Equity markets put a difficult 2018 behind them as they start the year on the front foot

Reflecting on January

What has happened?

Following a volatile 2018, a year which ended in losses for most major equity indices, 2019 has started on a more positive note, as least as far as stock markets are concerned. The MSCI World, an index of developed market stocks, returned 7.7% in January, its strongest start to the year in more than thirty years, while the MSCI Emerging Markets index returned 8.7%, the fifth best start to a year over the last three decades. Equity market strength has been broad-based with the UK’s FTSE 100 up by 3.6% in January, the US’ S&P 500 up 7.9% and the MSCI Euro Index higher by 5.8%, the third best January since the single currency’s creation.

Why?

There have been a number of factors that have contributed towards the strong equity market returns so far in 2019 and most relate to an easing of a number of the main concerns that were associated with the market heading into the year. The most common reasons for 2018’s poor equity market performance included tighter monetary policy from the Federal Reserve, political risks, in particular the US / China trade war and Brexit, and a slowdown in global economic growth. On the political front, there has been a notable thawing of relations between Washington and Beijing, with talks between both parties said to be making progress. Meanwhile, in the UK, although there remains considerable uncertainty surrounding Brexit, the market’s reaction to the latest developments (sterling has strengthened in the currency market and the FTSE 250 Index has outperformed the FTSE 100) would suggest that the probability of the UK leaving the European Union without a formal agreement has fallen. On global growth, economic data, as measured by the Citi Global Economic Surprise Index, has improved in January, albeit modestly. Additionally, the Chinese government has pledged to support the world’s second largest economy with both fiscal and monetary stimulus measures, the details of which are expected to be announced during the annual parliamentary meeting in March. Finally, after raising rates in December and signalling that a further two rate increases are likely this year, the US Federal Reserve’s Federal Open Market Committee made a significant U-turn in January, by indicating that the next move in interest rates is just as likely to be down as it is up. Fed Chair Jay Powell argued that “cross-currents”, including trade tensions and slowing economic growth in the eurozone and China, had prompted this change in stance.

What should you take away from it?

January’s strong performance provides further evidence in support of our view that it is very difficult to try and call the direction of financial markets over the short term. As referenced earlier, there were considered to be a number of significant risks to equity markets during 2019, and investor sentiment at the turn of the year had become increasingly bearish based on a number of metrics. The S&P 500 had just recorded its worst performance during December for more than 30 years as had the MSCI World. So the turnaround has been significant in January and would have been missed by investors who sold following December’s weakness.

Whether this rally continues throughout the year remains to be seen, however, we expect that there will be bouts of volatility and market swings either higher or lower that surprise investors. We therefore continue to advocate taking a long-term approach to equity investment. Those invested in the equity market should have a sufficiently long time horizon to ride out these bouts of volatility, and, rather than trying to predict short term market movements, we recommend searching for companies that stand to benefit from exposure to structural growth opportunities, and for those that run high-quality businesses with competitive moats that should be able to perform well through the economic cycle.

Please speak to your Investment Manager for any further information.

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