STOCK MAR­KETS GEOPO­LIT­I­CAL TEN­SIONS IN­CREASE

Long­est United States bull run in his­tory ends as Euro­pean stocks strug­gle fol­low­ing slump

The Irish Times - Business - - BUSINESS REVIEW OF THE YEAR - Joe Bren­nan Mar­kets Cor­re­spon­dent

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.

PHO­TO­GRAPH: AR­TYOM IVANOV\TASS VIA GETTY IMAGES

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

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