Monthly Commentary – December

Global equity markets slid by 7% in December to deliver the worst full year return since the financial crisis. As trade tensions persisted and the US Federal Reserve raised interest rates, investors were rattled by fears of a global economic slowdown.

The US rate increase was widely anticipated despite President Trump’s vocal disapproval and sparked rumours that Fed chair Jay Powell could be removed from office. Fed officials did, however, pare back their forecast for 2019 increases from three to two. The US Treasury yield curve partially inverted; although yield curve inversion has historically heralded an economic downturn, some questioned this event’s significance given the unusual policy environment.

Hopes of a thaw in US-China trade relations initially rose as both sides offered concessions. But optimism evaporated as President Trump’s tweets cast doubt on a deal and the chief financial officer of Chinese telecom giant Huawei was arrested in Canada at the request of US authorities. There was some respite later in the month as the US confirmed that it would host trade talks in January.

In Europe, Italy struck a budget deal with EU officials, but the French economy suffered from the disruption caused by the ‘yellow vest’ protests. In the UK, a Brexit agreement remained elusive as it became increasingly clear that Theresa May’s proposed deal would not pass through parliament in its present form. The vote was delayed to the new year as the Prime Minister sought to win further concessions from the EU. Although she survived a party confidence vote, the Brexit turmoil called into question the longevity of her government.

In the equity markets, the weakest region was North America. The Japanese market also performed poorly on worse-than-expected GDP data. Though all regions declined heavily, the UK was one of the least badly hit. Latin America performed best, helped by the revised US rate outlook and the reforms promised by Jair Bolsonaro, Brazil’s newly elected president.

All sectors were bruised, but defensive sectors and beneficiaries of a softer rate outlook suffered less. The utilities sector performed best as the prospect of slower rate rises renders its dividend streams more attractive. Conversely, the same prospect led to poor performance from financials. Economically sensitive sectors such as energy performed worst; the oil price plunged on fresh concerns about oversupply.

Gold was one of the few asset classes to perform well, gaining almost 5% as worries about global growth increased. The surge in the gold price benefited Newmont Mining, which was among our best performing stocks in December. Newmont is one of the world’s largest gold miners by production and reserves. After reducing the debt burden accumulated in the late 2000s, it now has one of the industry’s strongest balance sheets. Newmont is using its financial strength to advance new projects and pay larger dividends. Gold has performed poorly in recent years, but current volatility should highlight its ‘safe haven’ status. Newmont typifies the sort of opportunity we seek out – overlooked assets whose strengths are underappreciated.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.