Although volatility has settled down from the violent end of 2018, global growth has moved into the slow lane and geopolitical uncertainties continue to drive the markets at higher-speeds. In the UK, assets remain unloved and, as the Brexit clock ticks, recent rallies in sterling suggest the market would welcome any sort of agreement that helps pave the way for leaving the European Union.
An intriguing story from 2018 was how the bond market reflected investor sentiment shifts with yields and spreads not reacting in a typical way. In an unusual twist, government bonds ended up outperforming corporate bonds despite the fact that corporate bonds normally outperform in times of solid economic growth.
After some remarkable ups and downs in 2018, asset prices have come back to earth and global growth is now firmly in low gear. The US Federal Reserve’s quantitative easing (QE) withdrawal with four interest rate hikes last year made an impact across the board from widening corporate bonds to battered emerging market currencies and we expect this and the reaction to other central banks’ tightening to provide a headwind for the wider markets in Q1 of 2019.
Due to a plethora of economic and political uncertainties our strategy in Q4 2018 proved to be diligent and our focus in Q1 2019 will continue to be on a more defensive positioning. December was particularly volatile given the market’s reaction to the US Federal Reserve’s fourth interest rate hike of the year and there seems to be no end to spread oscillations (and further widenings) across all sectors given Brexit, ongoing trade tensions between the US and China and slower global growth.