STOCK MARKETS GEOPOLITICAL TENSIONS INCREASE
Longest United States bull run in history ends as European stocks struggle following slump
Facebook, which had been rattled in March by news that tens of millions of user profiles had been harvested and misused by data firm Cambridge Analytica, saw its shares go into freefall at the end of July Irish banks have been beset by weaker-than-expected mortgage book growth this year and concerns about potential political interference in the sector Nervous investors looking for signals saw plenty of reasons to sell in a month that would earn the moniker “Red October”. These included . . . the political ramifications of the murder of Saudi journalist Jamal Khashoggi
Stock-market Cassandras warning of impending danger were a brave species at the start of the year, as Wall Street indices hit fresh all-time highs on an almost daily basis and investors were happy to ignore mounting geopolitical tensions and toppy share valuations.
The bulls had plenty to cheer at the start of the year. US president Donald Trump had got his multitrillion-dollar tax cuts over the line just before Christmas, while International Monetary Fund managing director Christine Lagarde arrived at the World Economic Forum in Davos in late January with news that her staff had upgraded their global growth forecasts for this year and next. The world economy, she said, was enjoying its broadest pace of expansion since the start of the decade.
Lagarde had barely shaken the Swiss alpine snow off her boots and headed back to Washington, however, when stock markets staged a wobble. The Dow Jones Industrial Average, the best-known US stock market index, plummeted 12 per cent within two weeks, as bond market interest rates – or yields – spiked amid fears that the Federal Reserve would be forced into accelerated rate hikes to stave off an overheating of the world’s largest economy. Escalating US-China trade sanctions were also ratting investors at the time.
It turned out to be a mere market correction, with global markets picking up in late March following a period of robust corporate earnings and consumer confidence in the US and – closer to home – comments from the European Central Bank (ECB) that interest rates would remain at record low levels through the summer of 2019.
Still, in Europe, banking stocks were out of sorts from March as Italians backed two populist parties in general elections. This resulted in the formation in late May – following 88 days of negotiations – of a new government, raising concerns over the country’s future in the European Union.
Reached the landmark
Wall Street led global markets higher into the summer as strong economic and earnings data – particularly from technology groups – outweighed ongoing concerns about the US-China trade war. The US equities market recorded its longest bull run ever on August 22nd, as the S&P 500 reached the landmark of going 9½ years without a fall of 20 per cent or more.
Weeks earlier, iPhone and iPad maker Apple became the first US company to hit a $1 trillion market value, beating Microsoft, Amazon and Alphabet, parent of Google, to the milestone.
However, fellow technology giant Facebook, which had been rattled in March by news that tens of millions of user profiles had been harvested and misused by data firm Cambridge Analytica, saw its shares go into freefall at the end of July – sliding almost 20 per cent in one day – as the social media group posted weak quarterly earnings and signalled that user growth was slowing.
Global stock investors took fright in early October as Federal Reserve chairman Jay Powell signalled a possible more aggressive path for rate hikes, sending US bond yields to eight-year highs. Nervous investors looking for signals saw plenty of reasons to sell in a month that would earn the moniker “Red October”. These included a slowing Chinese economy, a strengthening US dollar, growing tension between Rome and Brussels over Italy’s expansionary 2019 budget, and the political ramifications of the murder of Saudi journalist Jamal Khashoggi in Turkey.
In Europe, stocks never fully recovered from the February slump, with the Italian stand-off, shortening odds of a no-deal Brexit, and weakening euro-zone economic data as the year progressed serving to dampen the mood.
While the Irish economy continued to fire on all cylinders – with the Government forecasting that gross domestic product (GDP) would expand 7.5 per cent this year as the State returned to almost full employment – the Iseq spent most of the year on a downward trend as Brexit hung over the market.
With just a day-and-a-half of trading left in 2018, the Iseq has fallen 23 per cent this year, leaving it on track for its worst performance since 2008.
That compares with a 7.7 per cent drop by the S&P 500, a 14 per cent fall by the FTSE 100 in London and the pan-European eurostoxx 600’s slide of almost 13 per cent.
There were also stock-specific issues in Dublin. CRH, which on its own accounts for a quarter of the Iseq, fell as initial euphoria in April over the group’s first share buyback programme in a decade gave way to concerns over the group’s rising energy and raw material prices, as well as the impact of severe weather in the US in September.
Another market heavyweight, Ryanair, was hit by volatile oil prices and industrial relations issues as well as a profit warning in early October.
Meanwhile, Irish banking stocks had a torrid year. Aside from the fact that the ECB has deferred until late next year any interest rate hikes (which impacts lenders’ ability to improve their lending margins and profits), Irish banks have been beset by weaker-than-expected mortgage book growth this year and concerns about potential political interference in the sector.
Housebuilders were also out of sorts, with shares in Cairn Homes and
Glenveagh Properties hammered by concerns about rising construction costs and a slowing house price inflation as Central Bank’s home-loan caps weighed – even though the State continues to grapple with significant undersupply of new homes a decade after the crash.
After a tumultuous year across global markets, analysts and stock pickers are divided over what’s next. “We are not particularly worried,” said Bernard Swords, chief investment officer at Goodbody Stockbrokers, who is predicting a recovery in equity markets in 2019 and a “relatively calm” performance by bonds. “Economic cycles do not die of old age. There must be a reason for the economy to roll over and usually there are warning signs. Yet across all the indicators – business sentiment, labour market, consumer sentiment – there is no sign of a peak arriving in 2019 for the US economy.”
However, James Sym, a fund manager with Schroders in London, said European investors face challenges in 2019, led by the return of inflation. “Anecdotal evidence tells us that many European companies are facing an increasingly tight labour market, so they may need to pay higher wages to attract and keep employees,” he said, adding that manufacturers, having kept a lid on investment in the past decade, will have to start spending again.
BlackRock, the world’s largest asset management group, advised clients recently that it expected global growth to slow next year. “Markets are vulnerable to fears that a downturn is near, even as we see the actual risk of a US recession as low in 2019,” BlackRock strategists said. “This cycle has been a long and shallow one – and still has some room to run in our view.”
Still, they are putting the probability of a recession by the end of 2021 at more than 50 per cent.
US president Donald Trump (left) and China’s leader Xi Jinping shake hands in Beijing last winter. Wall Street led global markets higher into the summer as strong economic and earnings data outweighed ongoing concerns about the US-China trade war