Published: January 10, 2019

Market Overview

Equity markets struggled in the final quarter of 2018.

Concerns mounted over equity valuations amid continuing uncertainty over a trade war between the US and China.

The US Federal Reserve raised interest rates for a fourth time for the year in December. However, expectations for further increases were cut slightly with two further hikes now expected in 2019 from three which were previously indicated. Even so, other central banks are gradually following the lead of the US as Quantitative Easing has reached its practical limits.

The pound was weaker against the other major currencies, including the dollar, euro and yen, due to fears over Theresa May’s Brexit deal.

Economic data indicate that growth is faltering.

The strongest data have been in the US, although there have been some signs of slowing momentum in leading indicators such as industrial production and durable goods orders. The outlook in the UK, Europe and Japan remains insipid whilst growth in China continues to moderate from a relatively high level.

Overall, 2018 was the weakest year for financial markets since 2008…

And most asset classes ended the year significantly lower. The optimism moving into 2018 fell away quickly and double digit falls would have been commonplace for multi-asset strategies generally were it not for the strong performance over the summer from US equities (especially tech) boosted by the impact of tax reforms.

Mindful of already rich valuations, our Core Portfolio Components missed out somewhat having not been heavily weighted to the US, while tactical opportunities in European equities opened in the Tactical Portfolio Components have been adversely impacted by the on-going US/China trade rhetoric. Other Tactical activity has produced positive returns, but this has been insufficient to overall outperform.

Despite significant weakness in the equity markets over the final quarter, it is important to bear in mind that global GDP growth of 3% is still expected this year.

This only marks a small fall from the 3.2% which was achieved in 2017 and is also likely to be the final outcome for 2018. Many commentators are forecasting sentiment to reverse and we will be positioned to benefit strongly from any green shoots in the UK and Europe in 2019.

Equities

The US equity market suffered a ‘fall from grace’ as investors showed concern over the valuation of technology stocks in particular. On a total return basis in sterling terms, the NASDAQ crashed by 15.2%. The broad based S&P 500 declined by 12.2%.

Other developed markets fared little better with the Nikkei 225 down 12.4%, the FTSE100 down 9.7% and the MSCI Europe Index off by 10.5%.

In a sad indictment of the quarter, the best performing sector was Emerging Markets which declined by 5.1%.

Fixed Income

Bonds benefited from a modest scaling back of expectations for interest rate hikes. Index linked gilts made a total return of 2.1%. Conventional gilts were close behind at 2.0%. The high yield sector fell by 4.1% as investors began to demonstrate some concern over lower quality issues. Corporate bonds and strategic bonds were little changed, down 0.4% and 1.2% respectively.

Gold

Gold advanced by 10% in sterling terms benefiting from uncertainty in equity markets.

Regards,

Euro Pacific Advisors Management Team

Published: January 3, 2019

Despite the recent sell off in the US, we continue to maintain our US exposure where we feel business will continue to be supported by deregulation, tax cuts and a pro-business tax reform.

The US has managed to shrug off a series of external shocks, political risks and enjoyed its fastest growth since 2005.

With confidence high, consumption and business investment have grown solidly despite a further correction in interest-sensitive residential investment.

Regards,

Euro Pacific Advisors Management Team

Market Overview

The continued escalation of trade tensions between the US and China led to a further flight to the relative safety of the US dollar and depressed asset prices throughout the rest of the world. This was most apparent in declines of overseas currencies and investors punished those where there are large current account deficits and a reliance on overseas sources of funding. Investment returns have been mixed and the dispersion of returns in the second quarter an ongoing theme.

Europe has confirmed that it will end its Quantitative Easing program by the end of the year, although interest rates are not likely to climb until next year. UK interest rates were increased to 0.75%, the first hike of 2018, but no further move is expected until after Brexit. There are no signs that Japan is ready to end its Quantitative Easing program and it recently expanded the range of equities eligible for purchase.

Economic data have been mixed. The US has continued to outperform other regions. Whilst growth picked up in the UK and Japan, there remain some doubts about its sustainability in these countries. Leading indicators in China point towards lower GDP growth. There remains a risk of US tariffs rising to 25% on the full range of US – Chinese imports with the most pessimistic forecasts suggesting a 15% yuan devaluation and China’s current account going into deficit. Meanwhile in Europe, the economy remains relatively solid, although political issues still linger.

Equities

The US equity markets outperformed again. This came despite the US Federal Reserve raising interest rates again and the market is now becoming more confident in their outlook for higher rates over the next year.

UK markets posted negative total returns over the quarter and the FTSE 100 lost -0.7% with the more domestic based FTSE 250 down -1.8%. The US made the best overall returns in global equity markets, the S&P 500 making a total return of +8.9% when converted to sterling. Eurozone indices and broad based emerging market indices were roughly unchanged.

Fixed Income

Government bond markets struggled as investors priced in the prospects for additional rate hikes, particularly in the US. Conventional Gilts made a total return of -2.0% with Index Linked Gilts down -1.4%. The only gains to be had were in High Yield which gained +1.9% and Strategic Bonds up +0.4%. Corporate Bonds were little changed, down -0.2%.

Gold

Gold fell by -4.4% in dollar terms over the quarter. The precious metal tends to struggle in an environment of rising real interest rates, although it remains valuable as a hedge within portfolios.

Regards,

Euro Pacific Advisors Management Team