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Dec 31, 2018

Goodbye to 2018: the year markets suffered worst losses since 2008

Big concern is the long bull market is over

On the final day of 2018 many investors may wish to quote poet Robert Graves by wishing a ‘goodbye to all that’ to 2018.

The previous 12 months have, at times, been difficult in the global markets, especially the latter part of the year: global stocks have suffered their worst losses since the financial crisis of 2008, wiping around 11 percent off the MSCI All Country World Index.

In London, the FTSE 100 has lost 12 percent since the start of January, hitting a two-year low. European indices are down more than 10 percent over the year and some of them are down over 15 percent – such as the German blue chip DAX – for this year. The Euro Stoxx 500 index is down by 13 percent in 2018 – the biggest loss since 2008, a common theme among global markets.

The biggest concern therefore is that the long bull market, which began after the great recession ended in 2009, could be over.

On-going concerns over trade wars and tariffs, a slowing global economy, Donald Trump’s unpredictable behavior and US interest rate increases, have all impacted on stocks this year.

Trevor Greetham, Royal London Asset Management’s head of multi asset, says in an investment note: ‘The last couple of weeks have seen a surprise unilateral decision to pull all US troops out of Syria, threats of a very long government shutdown if congress refuses to fund the Mexican border wall and a counterproductive attempt to blame the Fed for market weakness when it’s the trade war that investors are most worried about.

‘Elsewhere in the world Theresa May’s chaotic postponement of the meaningful vote on the EU Withdrawal Bill has added to the jittery mood in markets, raising as it does the risk of a no deal Brexit that would damage both the UK and euro area economies.’

Naeem Aslam, chief market analyst at broker Think Markets, however blames monetary policy tightening by the American and European central banks for this year’s losses.

‘The Fed stopped printing easy money a few years back and increased the interest rates four times this year. The European Central Bank (ECB) also ended up its quantitative easing program and there has been several discussion on the topic of the ECB normalizing the interest rates.’

Aslam warns the picture is not good for 2019. ‘The fact is that things aren’t looking really any brighter in 2019 as well because there are plenty of risk events which are going to keep investors on their toes.

‘For instance, at the beginning of the year, the first thing which investors will have to deal with is the Brexit chaos the UK leaving the European union. Then we have the US trade war with China and the ongoing struggle about securing the funds to build the wall.’

Naka Matsuzawa, the chief Japan rates strategist at the investment bank Nomura, broadly concurs in a note, stating that the global economy is on an ‘irreversible path to an economic downturn’. However, Matsuzawa notes: ‘We do not expect the economy to fall suddenly into a downturn, but to recover temporarily in the second half of 2019 to the first half of 2020 after signs of a slowdown strengthen through the first half of 2019.’

In a disturbing pointer for 2019, China’s manufacturing sector is now contracting. The official factory Purchasing Managers Index fell to 49.4 in December, official data shows, a two-year low.

This suggests the tariffs imposed on Chinese goods at the US border are hitting demand.

According to Mike Van Dulken, head of research at trader Accendo Markets, this data ‘may fan the flames of concern about slowing global growth’.

Chris Weston, head of research at Australian broker Pepperstone, notes the latest China data plays into the hands of President Trump. ‘Liquidity had been sucked out of markets because of downright pessimism. At the heart of it is US and Sino relations – Donald Trump would be rubbing his hands together at [China manufacturing data] because he’s got some leverage now.’

China’s stock markets have suffered a particularly bad 2018. The Shanghai composite index fell by 25 percent this year.

But on the close of New Year’s Eve Hong Kong’s stock exchange achieved a last-minute rally with the Hang Seng rising by 1.3 percent, boosted by Donald Trump’s optimistic tweet about the latest trade negotiations with China. This however, still leaves the index down 13.6 percent for 2018 – its worst since 2011.