While global stocks may have suffered their worst quarter in seven years, predicted profit growth in the US, UK and emerging markets during 2019 means investors could benefit from more earnings from the money they invested.
Here we look at what caused stocks to fall, how it compares with previous quarters and the subsequent outlook for stock market investors in 2019.
Figures released by Refinitiv show that the MSCI World Index fell 10.4% in 2018, its worst yearly performance since the height of the financial crisis in 2008. The UK stock market was also particularly hard hit, largely because of Brexit concerns, causing the FTSE 100 to fall 12.4%, again, the worst performance in a decade. Specifically, it was the last quarter of 2018 that performed particularly poorly, dropping 13.9% from the start of October to the end of December – the eleventh worst quarterly fall since 1970.
Whilst tax cuts in the US combined with an accelerated GDP growth rate of 4.2% on an annualised basis in Q2 provided a boost for investors at the start of 2018, economic growth elsewhere in the world decelerated. When further US tax cuts failed to materialise, and the US/China trade conflict escalated, a lack of monetary stimulus and concerns over economic growth only added to the pressure on stock market performance.
Source: Schroders. Refinitiv data for The MSCI World Index in US dollars as at 19 December 2018.
Prior to the fall, stock markets were in the midst of their longest bull run in history – the MSCI World index rose by 227% from its low of 688.63 in March 2009 to the highest level reported (2248.93 on the 26th January 2018) since records began. As the above chart shows, eleven months later it had fallen to a closing low of 1795.28 on 25th December, a fall of 20.1%. A fall of between 10% and 20% is viewed as a correction; a fall of more than 20% from its peak technically means we have entered a bear market.
As mentioned above, Q4 2018 was the eleventh worst quarterly performance since 1970 – when records began – therefore sitting just outside the top ten worst quarterly falls over the past 48 years. Furthermore, half of the twenty worst falls have occurred since the turn of the century; these include the dotcom bubble, which caused global stocks to fall 13.1% in Q1 2001, and the terror attacks on the World Trade Centres, which saw stocks fall 18.7% in Q3 of 2002.
|Rank||Year||MSCI World Index level (end of quarter)||% change||Reason for fall|
|2||Q4 2008||920.23||-22.2%||Global financial crisis|
|6||Q3 2011||1104.07||-17.1%||Eurozone debt crisis|
|7||Q4 1987||407.99||-15.9%||Black Monday|
|8||Q3 2008||1182.44||-15.7%||Global financial crisis|
|10||Q3 2001||926.02||-14.6%||Terrorists attack the World Trade Centre|
|11||Q4 2018||1883.90||-13.7%||Trade wars, slowing global economy|
|12||Q4 1973||108.41||-13.3%||Oil crisis|
|13||Q2 2010||1041.32||-13.3%||Eurozone debt crisis and the “flash crash”|
|14||Q1 2001||1061.26||-13.1%||Dotcom bubble bursts|
|15||Q1 2009||805.22||-12.5%||Global financial crisis|
|16||Q3 1998||952.39||-12.3%||Russia defaults on its debts|
|17||Q3 1981||136.53||-11.7%||Rising interest rates in the US hit the global economy|
Source: Schroders. Refinitiv data for MSCI World correct at 13 December 2018. Returns not adjusted for inflation or charges.
Analysts have predicted that profit growth in the US is projected to be 24%, with double digit figures also forecast for the UK and emerging markets. In simple terms, this means that any investor with shares invested in a company in one of these growing markets, could see their dividend earnings increase and use the opportunity to acquire further shares at a reduced price.
Furthermore, while market volatility has called for some investors to rebalance their expectations of returns, it has also provided opportunities for investors who may not have previously considered certain asset classes when prices were higher, allowing them to rebalance their portfolios in new ways. For example, according to Investec, the sell-off in emerging markets during 2018 has meant that emerging market equities are now trading on a 30% discount to developed market equities, presenting investors with the opportunity to buy them at low valuations.
If you would like to discuss opportunities on how to rebalance your portfolio, please contact your Finura adviser.
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