Monthly Commentary – January

After a dismal December, global equities began 2019 in much more cheerful mood. Hopes rose for a positive outcome to the Sino-US trade negotiations and the US Federal Reserve (Fed) appeared to take a more market-friendly stance. Jerome Powell, the Fed’s chair, indicated that interest rates might not rise as quickly as previously expected. This helped to allay the fears of slowing global growth that drove markets down in late 2018.

Nevertheless, signs of a slowdown continued to mount. Both the World Bank and the International Monetary Fund cut their global growth estimates and Mario Draghi, the European Central Bank’s president, said that risks had “moved to the downside”. Chinese data made for dismal reading too. Official GDP growth came in at just 6.6% for 2018, the slowest full-year rate since 1990. Exports weakened and car sales fell for the first time in almost two decades. In response, the People’s Bank of China cut the banks’ reserve requirement to free up cash for lending. Our manager visited China in January and will share his thoughts in upcoming articles on the website.

The UK parliament overwhelmingly rejected Theresa May’s proposed Brexit deal. Sterling later strengthened, however, on the prospect that Brexit could be delayed as the prime minister seeks to renegotiate the contentious Irish backstop.

In the equity markets, Latin America was by far the strongest region, boosted by the Fed’s changing tone and hopes of reform in Brazil and Mexico. The Fed’s softer stance also helped US equities, despite the longest government shutdown in history. The weakest returns came from Europe, where Brexit uncertainty lingered and Italy, Germany and France reported weak economic data. With the Sino-US trade war hurting its exporters, Japan also lagged behind.

Sector performances reflected investors’ increased appetite for risk. Real estate performed best, on the prospect of slower US monetary tightening. Energy – a sector we have long favoured – soared on optimism that the trade war might soon end and as the US imposed sanctions on Venezuela. Despite a warning from Apple about slowing Chinese demand, the IT sector was resilient. Although all sectors rose, traditionally defensive areas were the weakest. These included utilities, consumer staples and healthcare – all sectors that had performed well at the end of 2018.

One of our strongest performers was French supermarket operator Carrefour, the world’s second-largest retailer by sales. France is its most important market, but its geographic exposure extends throughout continental Europe, Latin America and Asia. As bloated costs and deteriorating brand perception have weighed on sales and margins, Carrefour’s shares have fallen from favour. New CEO Alexandre Bompard has set out an ambitious turnaround programme, involving overhauling cost structures and closing underperforming stores. Savings of €2 billion will be channelled into reinvigorating the business. Meanwhile, new procurement partnerships should boost Carrefour’s competitive position. Recent results showed encouraging trends in the French business and cost savings remain on target. We see considerable potential for an earnings rebound. In the meantime, the shares offer a sustainable dividend – so that we are being paid to wait.

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.