Economic Commentary – 2018 Review

January 4th, 2019, by Martyn Torevell

2018 was a difficult year for investors with falls in all major stock markets and many other asset classes. Cash was amongst the best performing asset classes for US investors, and the same would have been true in the UK if the fall in Sterling had not enhanced the returns generated by overseas assets. Hedge fund and property indices fell over the year.

The FTSE 100 index fell by over 1,000 points or 12.5% (in capital terms) to end the year at 6,728 (having started the year at 7,688). Dividends remained strong and once these are taken into account the FTSE 100 index lost 8.7% over the year on a total return basis.

Many other global equity markets fared worse; the MSCI indices for Europe ex UK, Asia Pacific ex Japan and Emerging Markets were down by 11.3%, 10.6% and 10.1% respectively in local currency terms (losses in Pounds Sterling were slightly lower).

The MSCI Japan index fell by more than 15% over the year, although the strengthening Yen reduced the loss to 7.8% in Sterling terms. American stockmarkets also fell with the S&P500 index down by 4.9% over the year, but currency movements converted this into a gain of just under 1% in Pounds Sterling.

As equity markets fell we have seen a rebound in traditional safe haven assets including gold, Japanese Yen and government stocks. The price of gold rose by nearly 5% in December and is up by 9.8% over the last quarter (in Sterling). The Yen rose by around 3.7% against Sterling and the US Dollar in December and has appreciated against most major currencies over the last quarter, despite the Japanese Central Bank continuing to adopt an ultra-loose monetary policy.

Most of the damage to stockmarket returns was done in the final quarter of the year. The FTSE 100 lost 9.6% over the final three months, whilst the S&P 500, MSCI World and MSCI Europe ex UK, and Japan indices all fell by more than 11%. American stock markets were particularly volatile in December with technology stocks down by around 20%. Falls in US stockmarkets would have been more severe had it not been for a sharp rally of around 7% from 26 December to the end of the year; The Dow Jones index rose by over 1,000 points (or more than 4%) on 26 December alone.

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