“Australian bonds are another one to add to that list.” he says. “The bond market has done well because there’s an economic slowdown in China and we have the risk of a material decline in the Australian housing market. It’s under the largest stress it’s seen in several generations.”
He adds that holding shares hasn’t been enough to hedge against the housing downturn, particularly in a year which saw global equities fall.
“Equities have been the poster child for poorly-performing assets,” Sherwood says.
The MSCI World Index fell 12 per cent over 2018. The index had been hovering around parity for most of the year, until it began to fall in middle to late October.
“For most of the year I think things were progressing pretty well – inflation in the US remained under control, bond yields didn’t rise too far and growth remained good,” says Betashares’ chief economist David Bassanese. However, that story shifted in the last couple of months, when “it all fell in a heap”.
Bassanese says the “Donald Trump factor” has been bad for market volatility. “Rumours about him wanting to sack [Federal Reserve chairman Jerome] Powell is the straw that broke camel’s back [recently].”
He believes the market has overreacted to Federal Reserve rate rises and that “fundamentally, I think things still look OK”.
US-listed tech stocks had been among the best performers on the market in early 2018 but slumped during the latter few months.
The NYSE Fang+ index was up 37 per cent in late June from the start of the year, but lost that gain to end the year slightly below parity. Swell Asset Management chief investment officer Lachlan Hughes says global market volatility was to blame, as the fundamentals for many of these companies are still good.
He cites Facebook in particular as having “a bit of a disaster year” in 2018. Facebook stock was down 24 per cent as of the last week of 2018. Hughes says the Cambridge Analytica scandal and growing concern amongst users about data privacy had negatively impacted the stock price. Despite this, he says, the difference between the price and the fundamentals offers investors an opportunity to invest in Facebook.
It was also a bad year for emerging market, which were particularly hit by the Fed tightening rates, with the MSCI Emerging Markets Index down 18 per cent.
The fall in emerging markets was due to capital flowing to US assets offering higher returns, according to Morgan Stanley. The broker says emerging markets had “struggled” in 2018, facing a bear market which started before most other asset classes.
A growth slowdown in the US in 2019 will help rebalance capital flows from the US back to emerging markets, says Morgan Stanley analyst James Lord. “The fact that we expect the global growth slowdown to be led by the US is a key reason why we think that emerging markets assets can perform better,” he says. This rebalance has caused Morgan Stanley to become bullish on emerging markets, in particular from the first quarter of 2019.
The broker predicts volatility in emerging markets will continue in the short term, driven by global trade tensions and the US Federal Reserve hiking interest rates.
Those global trade tensions particularly hurt commodity prices, with investors concerned over demand due to China’s large consumption of metals and agricultural commodities.
“There’s a whole China story hiding behind this generally,” says IKON Commodities director of advisory and projects Ole Houe. “2018 has generally been a year of consolidation and recovery. It’s been a year of hopes outpacing reality in terms of demand. We’ve had a couple of years of slumps in most commodities and this has been the year of green shoots and signs we were about to take off but it’s been disappointing so far.”