Quarter 4 of 2018 was an unforgettable one for investors and hopefully only a painful memory now. The same forecasters who couldn’t tell you in advance where the declines were going to come from will now tell you with certainty where they did. The benefit of hindsight allows these people to point to Trump’s spat with the Federal Reserve over interest rate rises, the Fed’s ramping up of both interest rates and the rate of asset sales to reverse QE, the UK’s inability to maintain a position on Brexit and some bad corporate news. In reality, all of these factors were present at other times of the year and no one really knows why the global equity markets decided to fall so sharply in quarter four. In particular, US equity positions had held many portfolios up all year only to drop them like a stone in the last few weeks of the year.
In the last quarter of 2018, to many people’s surprise, traditional diversification into fixed interest (government bonds and corporate bonds) protected some of the losses from the world’s stockmarkets. The concern for a long-time now has been of a ‘bond bubble’ in fixed interest. Low and even negative yields from these investments suggest that at some point we will see losses here too but for now they held their value better than shares and softened an otherwise heavy Christmas landing. As a result, simple passive strategies continued to outperform active. This is a trend to keep an eye on as the active management advocates have always claimed that the performance lag of active vs passive in the last decade of rising stockmarkets would be reversed when markets started to fall. This claim hasn’t proven to be true and so active managers need to have a good 2019 to justify their fees or will face further fund outflows.
The UK is still likely to be an odd place for capital looking for a home for at least a further quarter in 2019. There are very few politicians willing to be honest with the population about the economic effects of Brexit whether they think it is a price worth paying or not. We have played our hand so badly that with a matter of a few weeks to go no one in the country even knows what type of Brexit we are heading for. UK investors could be forgiven for throwing the towel in right now but as we have said before the most important thing you can do as an investor is to stay the course and ignore the short-term. You should also ignore quarterly updates such as this one.