When Fear Rules
Estimated Time To Read: 2 minute(s) 10 seconds
The last quarter of 2018 was a harrowing time. Towards the end of September 2018, the larger international markets started to plummet and continued to do so until Christmas Eve. In total, 18% was wiped off the world global index in dollar terms, but no one could quite put their finger on why.
In summary, fear took over market players and a cacophony of issues combined to change sentiment. Once sentiment changes for the worst, it accelerates quickly and even the bravest and calmest investors start to get twitchy.
So, what were the different factors driving the market?
1. Share markets globally were too high
We were in the longest bull (up) market in history. Investors were simply looking for a reason to take chips off the table. Markets were certainly pricey, but they were not 20% over- priced.
2. Earnings were too high
The surprise of the previous two years was the level of profit margin companies were making globally. Many analysts believed that these margins were going to come down as they were unsustainable. Any company news that fed that narrative as results were released was punished very harshly.
3. Too much leverage/borrowing within companies
There was a fear building that companies were again starting to borrow money to expand. This according to asset manager Louis Stassen from Coronation was a healthy level of debt and the duration was relatively short and companies would be able to cope.
4. Trade Wars
Yes, you guessed it, you cannot talk about world economies and economics and not include Mr Trump in the conversation! He threw down the gauntlet to China. This is a healthy debate with China on its business practices and policies that support their companies but hinder US companies in particular. This has been a long time in coming and China needs to be dealt with at some point. The US should emerge with a better deal in the next few months and both sides will need to emerge strong to their home audience.
5. Politics globally
The underlying unhappiness among ordinary people globally is palpable and is now spilling over into the streets of Europe and in emerging markets. This is unsettling in general as voting patterns continue to move towards the extremes of both sides in a very incoherent way.
So, where are we now?
World equity markets measured by the MSCI world Index was at 2200 points on 21 September, 2018. It fell to 1802 points, or by 18%, on 24 December 2018. It has now bounced back 14% to 2096 points after a remarkable and swift recovery.
As Portfolio Manager Louis Stassen said to us last week, the markets are not going to come to a grinding halt in the next year, but we have concerns about future profit margins and would describe developed international markets fairly priced and are now taking up a slightly guarded position offshore.