Global equity markets ended 2018 in the red, a downturn not seen over the past decade, with the MSCI World Equity Index tumbling by more than 9.5% YoY

by JERRY LEE CHEE YONG

Investors would have done well to hold cash for the whole year of 2018 as it was a nightmare for almost all equity investors.

Global equity markets ended 2018 in the red, a downturn not seen over the past decade, with the MSCI World Equity Index tumbling by more than 9.5% year-on-year (YoY).

In total, the global combined equity market capitalisation lost about US$12 trillion (RM49.2 trillion) in value last year and about US$20 trillion since peaking on Jan 26, 2018.

The loss in market capitalisation was the second-largest in history after the global financial crisis in 2008 where we saw more than US$27 trillion in market capitalisation wiped off in a single year.

The increased volatility in 2018, as measured by the CBOE Volatility Index or VIX, was something most investors were not used to after very low volatility in 2017.

In the US, the intraday fluctuations of more than 1% in the S&P 500 were 64 times compared to the total of eight times in 2017.

Historically, there have been only eight times when the Dow Jones Index swung more than 1,000 points in a single session, and five of those took place in 2018.

The factors that contributed to the increased volatility include the China-US trade issue, slowing economic growth in China, tightening global liquidity, as well as the longest emerging-market (EM) rout since 2008.

The US and China trade issue was one of the main factors that drove the equity markets lower as market participants worried about global growth slowdown.

The trade disputes started when US President Donald Trump signed a memorandum directing the office of the US Trade Representative to file a World Trade Organisation case against China for its discriminatory licensing practices and impose tariffs on US$50 billion worth of imports from China.

Trade tensions between the two largest economies in the world has escalated, following the proposal of 10% tariffs on additional US$200 billion of Chinese goods.

The unsettling trade disputes coupled with the ongoing deleveraging efforts in China have added pressure to the already softening economy in China. China’s economic growth sank to the lowest level of 6.5% YoY, a level not seen since the global financial crisis.

China has become a growth engine for the global economy over the past decade. Hence, investors are gene-rally worried a hard-landing of China economy might cause the global economy to lose growth momentum, especially with the ongoing trade disputes with the US which can create disruptions to the global supply chain.

The year also saw the US Federal Reserve (Fed) raising its benchmark interest rate four times, thus pushing the lending rate to a range of 2.25% to 2.5% from 1.25% to 1.5% in 2017.  Fed chairman Jerome Powell in the latest news conference, mentioned the central bank will continue to trim its balance sheet by US$50 billion each month.

The rising rates in the US has resulted in a flattening yield curve which is usually seen as a sign of recession.

The flatter yield curve was due to the aggressive rate hike projections which drove short-term interest rate higher, while the cautious outlook on inflation and growth kept the long end of the yield curve lower.

The tightening liquidity and fear of a recession hurt EMs with fund outflow and currency depreciation.

Contagion fear from Turkey and Argentina triggered a broad sell-off in global equities in mid-year. EM stress is not a new issue with the last such episode seen in 2013 (with the taper tantrum).

One of the similarities between 2013’s Taper Tantrum and today is fragile EMs face a “twin deficit” problem of fiscal and current account. These include Argentina, Turkey, Indonesia and the Philippines.

The strong rally in 2017 saw stretched valuations in the global equity markets at the beginning of 2018. The US equities was the only equity market trading in the positive territory last year before the hefty sell-off in late 2018.

Following the sharp decline in 2018, global equity markets are now trading at attractive valuations.

The undemanding valuation and reasonable earnings growth expectation, we believe, present a potential investment opportunity for investors with a longer investment horizon.