European equities: In line with the rest of the world

European equities dropped in line with the rest of the world as volatility jumped higher in December. In Europe, flash PMIs for December disappointed and dropped to their lowest level in more than 5 years – implying Eurozone GDP growth of just 1%. The political situation in Europe didn’t meaningfully improve: the Brexit political turmoil continued, though May survived a no-confidence vote after postponing the parliamentary vote on her Brexit deal; the Italian government proposed a new 2019 deficit target of 2.04% and, for the time being, has avoided an Excessive Deficit Procedure (EDP). Sector-wise, Basic Resources was the only sector in green, bouncing back from November’s weakness and led by Miners (supported by higher prices in iron ore). Utilities – led by Iberdola, Enel, Endesa and Fortum – also outperformed, as power prices rallied and improvements in the Italian-EC negotiations provided additional support. Eurozone Banks – dragged down by the French banks – were the worst performers, while Retail also suffered,

We kept our underweight positions in Energy (considered relatively expensive) and overweight in Financials on the grounds of a positive risk-reward, with potential upside over the short term. Any positive outcome from the Brexit deal and US-China trade talks could be potential supportive factors for the region in the short term while the macro-environment in the mid-term should be rather challenging.


 

US equities: Strong sell-off in December

US equities experienced a very strong sell-off in December. Several factors drove the sharp decline in US equity markets, including: 1) Disappointing growth figures – most investors thought China and Europe would have stabilized by now but the latest data from both economies suggest that this isn’t happening. Meanwhile, the preliminary December data from the US is signalling softness on the American front, too; 2) The FOMC raised the target range for the fed funds rate by 25bps and its statement slightly more hawkish than anticipated; 3) Fiscal and monetary stimulus was insufficient to support markets; 4) Corporate earnings: a by-product of the economic growth anxieties was the growing concern about the outlook for earnings (which remained nonetheless rather positive). On the US-China trade-war front, Trump and Xi reached a ceasefire back at the G20 in Argentina and Beijing has made a number of conciliatory gestures aimed at paving the way to a more permanent compromise. Outside the trade-war conflict, the US continues to take actions aimed at China’s tech industry (Huawei, hacking, forced IP transfers, etc.). 

We kept our overweight in Health Care (still-resilient market) and Information Technology (on positive valuations), while slightly increasing our position in Real Estate to ‘neutral’, as long-term yields retreated during the period.

 
 

Emerging equities: Worst Annual Performance since 2011

Emerging markets fell in December – as, indeed, did most markets – but still managed to outperform developed countries. China was the worst-performing region, despite a temporary truce with the US, while India stayed flat.

Emerging Market equities lost 2.9% but outperformed developed countries by 4.8% in December. Asia lost the most and LatAm and EMEA also finished lower. 

Asian equities, dragged down by index heavyweights China and Korea, fell around 3%. 

The underperformance of China was driven by a mix of negatives from both domestic and external fronts. The sigh of relief following the US-China trade talks during the G20 meeting was short-lived, with the arrest of Huawei CFO Meng Wanzhou dampening investors sentiment. Presidents Xi and Trump reached a 90-day truce agreement in the trade dispute and the US agreed to hold off plans to raise tariffs on 1 January 2019 on Chinese imports. 

Korea and Taiwan suffered selling pressure from US tech sector  weakness. In LatAm, Brazil was dragged down by tumbling energy prices, while Mexico was the best-performing EM country in December, following earlier weakness. Falling oil prices, together with a rate hike, put some pressure on Russian stocks. Cyclicals lagged Defensives in general in EMs, with Utilities the sole sector to gain last month, while Healthcare and Consumer Discretionary lagged. 

With a loss of 17% (in USD) over the whole year, emerging markets strongly 

underperformed developed markets, especially the US. With the exception of Qatar, all markets lost ground. Turkey, as well as major markets like China, Korea and South Africa, dragged performance down. India, Russia and Brazil were among the most resilient regional markets. Energy was the only sector in 2018 to end on a positive result, while growth sectors like Healthcare, Consumer Discretionary and Technology closed the performance ranking.

We did not change our positions over the month in a context of global trade uncertainty and policy risk. Valuations for most emerging markets have become attractive, but markets will need a catalyst to regain an upward trend. Besides (geo)politics, the US and China will continue to dictate overall market sentiment and direction. The focus will remain on the Fed’s monetary policy (economy-driven end of rate increase), balance sheet and US dollar evolution. China growth trend, monetary and fiscal stimulus efforts and trade discussions will also be key.

 

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