Katz's Corner: Relief after December! Is it here to stay?

TAMIM Joint Managing Director Darren Katz takes a look at the financial world in the month of January and takes a brief look toward 2019. Global markets got some much-needed relief through January and early February after a disappointing end to 2018. Risk assets across both emerging and developed markets were boosted following a perceived dovish pivot by the Fed and a perceptibly more subdued tone coming from the White House as pertaining to the trade talks.

An important development in the negotiations has been the disentanglement of trade and intellectual property theft which we believe bodes well for negotiations. Nevertheless, significant headwinds continue to be evident in the form of political uncertainty especially in the Eurozone and mixed signals for global growth prospects. We continue to be cautious going into 2019 paying particular attention to the policy risk and closer to home the housing market as well as, consumer sentiment.

United States
US markets finished on a broadly positive note with the S&P finishing over 8% in the green, recouping some of the losses over the December quarter. The uptick was buoyed by the Federal Reserve indicating that it remained flexible and further rate hikes, while still on the longer term horizon, were likely to be contained especially making note of muted inflation figures. That said, the fundamentals remain strong with consistent wage growth at 3.3% YoY and a slight uptick in the participation rate. However, uncertainty still remains around the political environment. The federal government shutdown and the trade war has done significant damage to consumer sentiment and PMI numbers for December might point to more pain ahead.
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On a sectoral basis, the best performers were largely industrial and energy stocks whilst the traditional defensives such as healthcare and staples were under-performed comparatively. Weaker trade conditions have also been highlighted by heavyweights Apple and Amazon in their guidance.

Europe
Europe continues to be a mixed bag. Though most indices across Europe rallied through January with equities finishing up 6.3%, they were nevertheless significantly hampered by the political dramas unfolding from Brexit to uncertainty around some of the weaker members, particularly Italy. While equities remain cheap on a historic basis, corporate leverage and concerns about Eurozone growth (especially with Italy having entered a technical recession in 2018) point to a less than rosy picture ahead. 
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In the UK the FTSE 100, though performing well, has under-performed global equities following the sudden strength in the Pound Sterling. The relationship between the FTSE 100 and the GBP tends to be inversely correlated since the companies within this grouping derive the majority of their revenues globally. As such, they benefit from a lower currency. However, even this relief might be short-lived if the May government is unable to find a mutually agreeable solution around Brexit. We could very well end up in a situation where the above inverse correlation is broken and the FTSE 100 falls simultaneously with the Sterling.

Emerging Markets
Emerging markets performed well over January with the exception of India. The Modi government’s election budget (largely full of handouts and expansionary) as well as a recovery in oil prices (i.e. India being a net importer of Oil) saw the NIFTY 50 falling over 9%. However, the rest of the Emerging Markets indexes were positive with noteworthy mentions being Brazil finishing up 10.3% following the new government's plans for pension reform and Turkey where investors flooded back into the financials in search of yield. The Turkish central bank has also maintained headline interest rates at 24% giving support to their inflation targeting regime.

In China, the somewhat muted growth figures and the fall in exports was overcome with the government indicating a new round of tax cuts and increased infrastructure spending. Investor sentiment was also helped by the PBOC indicating that it would undertake policies to expand credit growth, namely through the cutting of capital adequacy ratios. Thailand also recorded significant double digit gains following greater clarity around the political situation with the current regime increasingly likely to hold onto power post-elections.

Australia
Closer to home, concerns over the housing market continue to dominate investor sentiment with house prices extending their decline into 14 consecutive months nationally. Business sentiment also continues to miss expectations broadly and CPI pressures are muted. This has caused the RBA to keep monetary policy unchanged though it remains cautiously optimistic, which perhaps is another way of ruling out any further policy changes or maintenance of the status quo. 
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The RBA’s stance and the lack of any structural reforms following the royal commission led to a significant reprieve for equities in January, which was also helped along by star performers and heavy index weightings in mining and energy stocks such as BHP, Woodside and RIO.