• The return of volatility
  • Brexit
  • Trump tariffs and trade wars
  • The rise (and fall?) of FAANG in the US


This year one word has summed up the UKs financial news – Brexit. Barely a month has gone by without tumultuous articles and heated debates on the future of Britain outside the EU. So far our journey has included (at the time of publishing) a draft withdrawal agreement, the resignation of 6 ministers (including the Brexit Secretary), a cancelled Commons vote and news from the European Court of Justice that the UK can cancel Brexit without the consent of other EU states – all we are missing at the end of the year is a partridge in a pear tree.

With such political uncertainty it is of no surprise that the markets have been sensitive giving rise to greater volatility than we have been used to in past year. Sterling has also been deeply affected, falling to a 20-month low in December. This can be seen as both a double-edge sword for the economy as companies trading in USD and euros see that profits appreciate by this fall in sterling value, indeed a significant portion of the FTSE constituents benefit in this way with large caps outperforming mid-caps as they take advantage of a strengthening dollar. Brexit has also taken its toll on the UK housing market with the South East and London particularly affected seeing house price growth slow to a 6 year low in November.

In other news wages are now rising at their highest rate since 2008 with average UK wages at their highest since 2011. This is coupled with low unemployment (albeit higher than a year ago) and the news that average wages are now increasing at a faster rate than inflation. August brought us news that the Bank of England would raise the UK’s interest rate for the second time in a decade, from 0.5% to 0.75%, and announced that interest rates would continue to increase albeit at a gradual pace and to a limited extent.

Towards the end of the year a drop in crude oil prices and global macroeconomic worries further dented UK equities with poor performance through October and November with Brexit uncertainty also impacting companies with significant UK domestic exposure.

Looking ahead we expect to see continuing volatility into at least the first quarter of 2019 as talks continue over Brexit and the future of British politics.


The year started off strong for the US with positive earnings momentum, supportive economic data and unemployment at an 18-year low of 3.8% however the honeymoon wasn’t to last – worries over rising US interest rates and wages, increasing inflation and rising government bond yields sparked a market sell-off which began with an ominous 666 point loss and included the Dow Jones’ worst point decline in history –  1,175 (-4.6%, the biggest decline since 2011). Ripples were soon felt across the globe as the reality of the return of volatility dawned on investors and the markets slipped into correction territory.

As we moved through the year however, US equities came into their own, significantly outperforming every other major region throughput the third quarter with a boom in US stocks and Treasury yields. One group of stocks made headlines throughout 2018 – FAANG (Facebook, Amazon, Apple and Google’s parent company Alphabet). This group of tech stocks have shown meteoric growth over the past few years with surging revenues and strong investor sentiment albeit with significant volatility. However, 2018 brought cracks to the surface as slowing growth forecasts and a series of idiosyncratic issues started to take their toll on FAANG valuations. As of November, all 5 constituents found themselves in a bear market – a decline of 20% or more from their recent highs amounting to more than $1 trillion, a higher loss than all cryptocurrencies combined during 2018. Netflix came out worst, down 34.8% from its recent high (as at 13th Dec), followed by Facebook (-33.7%), Apple (-26.8%), Amazon (-19.1%) and Google (-16.9%). Despite this, Netflix and Amazon are both set to end 2018 in the black with total growth (up to 18th Dec) at 41.14% and 32.67% respectively.

Another theme dominating US market headlines this year was the infamous trade wars. Worries started early in the year with President Trump placing a 30% tariff on foreign solar panels with China being the world leader in their manufacture. Tensions rose as tariffs were considered on to up to $60 bn of Chinese goods in March as a response to “the unfair trade practices of China” which according to some US sources included theft of US intellectual property. China responded by imposing tariffs on 128 products that it imports from the US in April, igniting a series of tariff threats and retaliations throughout the year. Total tariffs applied to China now amounts to $250bn with total tariffs applied to the US from China standing at $110bn. December 2nd saw a temporary truce between Trump and Xi following the G20 summit with both countries agreeing to refrain from increasing or imposing new tariffs for 90 days as the two countries work towards a trade deal. Throughout the year fallout from escalating tensions has affected markets beyond the US and China as countries deal with the prospect of new tariffs placed on their exports as they get caught in the crossfire and the possibility of China’s unfair trade practices coming to light.

Closer to home the US has seen real GBP growth logged above 3% mid-year, this is above most estimates of the US’s long-term potential. Earnings growth in the S&P 500 Index has been 25% or higher in every quarter this year – something usually only seen on the way out of a recession. We have also seen the unemployment rate reach a 49-year low. Signs have pointed to strong fundamentals for the US – but is this the peak? The October correction has already shown the impact of global markets starting to slow, especially on FAANG and other US technology stocks. This year we saw US Treasury yield curves further flatten with the difference between short-term and long-term yields coming ever closer together. On 3rd December the Treasury yield curve inverted for the first time since the recession, this has previously been seen before the recessions of 1981, 1991, 2000 and 2008 – a sobering reminder. Looking forwards it looks like US growth will slow and Fed rate hikes will continue into the new year with renewed trade talks due in March.


Europe did not escape geopolitical risk either this year. Besides the ongoing Brexit talks we have seen a rise in populist movements across Europe with increasing worries that Eurosceptic parties will take a greater share of votes prior to the critical European Parliament elections coming in May 2019. In the first quarter we saw the results of Italy’s general election with the anti-establishment Five Star Movement emerging as the largest single party in a hung parliament. 3 months later a coalition was formed between the Five Star Movement and the League parties easing some worries over the uncertainty. However, fears over Italy resurfaced in October as their draft 2019 budget was rejected by the European Commission with a 3-week deadline imposed for the new draft due to the deficit target of 2.4% GBP being too high – this was refuted by the Italian Government before relenting and setting their target at 2.04% to avoid EU sanctions. News of this lead to a drop in the 10-year yields on Italian bonds and the spread between Italian and (traditionally safe) German bonds dropping to 266 points down from 300 in October. Currently Italy’s debt stands at €2.3 trillion with the cost of servicing this set to rise in the coming years.

Unfortunately, Europe couldn’t escape the crossfire of this year’s trade wars with potential tariffs on the auto-trade weighing heavily on the sector. Fears were partly assuaged following a July meeting between the US and EU presidents with an agreement reached to work towards zero tariffs on non-auto industrial goods and for auto tariffs to be put on hold pending further talks. This, coupled with a struggle to meet the EUs new emissions standards has led to a slowdown in trade and has been one of the factors to Germany’s economy contracting -0.2% in the second quarter this year.

We saw positive returns from European equities in the second and third quarters of the year despite the political uncertainty. Economic data showed slow but steady growth with the European Central Bank announcing that it expects to end its quantitative easing programme in December 2018 with no further interest rate rises through into summer 2019. As we moved into October and November however Europe shows disappointing results – MSCI EMU index returned -6.5% in October and -0.9% in November. Data has also shown a slowing of economic growth in the region with the flash composite purchasing managers’ index reaching a 47-month low in December indicating poor consumer confidence. Hopefully the new year will help pick up the sluggish economic data with a reduction in fears over trade tariffs and political worries in the EU.

Emerging Markets and Asia:

This broad sector saw a year of mixed results with many countries affected heavily by the US trade tariffs, the strong US dollar, an increase in global volatility and a smattering of idiosyncratic political events that occurred this year. The year started strong despite a rise in volatility with the MSCI Asia ex Japan and the MSCU emerging market indices both seeing positive returns. Among the best performers during the first quarter were Thailand, Taiwan and Brazil. Among the weaker performers were India who suffered from news of reported fraudulent activity at a state bank, a poor result for the ruling state party and, later in the year, struggled with rupee weakness and oil prices. Although November saw them gain ground as oil prices slumped and the rupee strengthened against the dollar. The retreat of oil prices from their recent highs has alleviated pressure from many of the Emerging Market (EM)/Asian countries as the high prices earlier placed a drag on consumption and weighed heavily on the more fragile emerging economies.

Dollar strength proved to be a major headwind for EM and Asia along with more rapid rising of interest rates in the US. As the Fed increases rates in the US, this takes international money flows away from EM’s which puts pressure on funding their fiscal or current account deficits. We also saw a strengthening dollar throughout the majority of 2018 which put further pressure on many EM countries whose debt is denominated in US dollars – the combination of which is an uncomfortable one for many countries. In August we saw Turkey’s currency, the Lira, plunge more than a third against the dollar as Turkish inflation edged above 15% with worries further fuelled by President Erdogan’s unorthodox economic policy. Despite the odds in late November the Lira hit a 4-month high against the dollar with an increase of 36.8% showing hope in volatile times for EM markets for the next year.

It wasn’t just the US currency that gave EM/Asian markets a headache this year – the dreaded trade tariffs have been a huge theme for this sector in 2018. One of the main targets, as discussed earlier, was China who was the subject of the majority of Trump’s trade war threats with accusations of unfair trade practices, theft of intellectual property and months of exchanging further tariff warnings between the two nations. Currently the US has imposed tariffs on $250bn of Chinese products and has threatened to impose tariffs on $267bn more whereas the total amount of Chinese tariffs applied to the US stands at $110bn. In December the two countries agreed to a temporary truce to de-escalate trade tensions following the G20 summit with the world waiting to see whether further positive talks will take place in the new year. Looking away from US relations, China has seen a slowdown in growth so far in 2018 with the introductions of a looser fiscal stance and more accommodative monetary policy. It may be too early to see the effects of these policies and we look to the new year to see if introduced and planned economic stimuli can revive the economy or perhaps help combat this year’s slowdown.

Elsewhere in Asia we saw weaker performance in the South, especially during October as trade worries spread throughout the region with Vietnam being the only large south-east Asian economy to gain momentum in this period. Despite the momentous Korean summit this year, South Korea also saw sharp losses in October with GDP growth at its slowest in 9 years and was -0.2% compared to the previous year-on-year estimate.

In 2019 we expect trade tensions to continue fuelling volatility across Asia and EMs along with the varying strength of the dollar and changes in interest rates and inflation among this sector’s countries. Geopolitical factors are also expected to continue to affect markets with elections coming in Nigeria, India and Argentina coming in 2019, although we hope that natural disasters that affected Japan’s economy this year won’t be so prevalent this coming year.