This year got off to a flying start with the MSCI World (up 7.8% in January) delivering its best start to the year since 1987. However, we note that last year also got off to a cracking start with the MSCI World rising by 6.5% in the first three weeks of 2018, basking in the euphoria of the then recently approved US tax cuts, but this sugar high ran out and markets then corrected by 10%. Nonetheless, this time around the rally pushed right through to month-end, although we highlight that it was more of a relief rally as markets tried to fight back from the disastrous end to 2018 – the MSCI World was down 13.4% in 4Q18 (its worst quarter since the European sovereign crisis in 2011).
Almost half of S&P 500 companies released 4Q18 earnings during January, with those companies that reported results delivering 14.8% YoY earnings growth. The final quarter of 2018 is the last quarter which will see earnings growth boosted by US tax cuts. Facebook was among the stocks delivering stellar results, which helped the counter end the month 27% higher. The January US Federal Reserve (Fed) meeting went a long way towards easing concerns that the Fed would hike rates too aggressively and bring on a recession. The Fed changed the language in its statement to indicate that it had shifted from a hiking mode to a neutral mode – indicating that future rate decisions could include hikes or cuts.
January also delivered some de-escalation in geopolitical tensions, with the prospect of progress in trade talks between China and the US. US President Donald Trump also backed down (albeit temporarily) on his demand for funding for a wall on the Mexican border, opening the way for 800,000 US government employees and 1.2mn government contractors to get back to work and to being paid again after a 35-day US government shutdown (almost twice as long as any previous shutdown). In the UK, Brexit continued to deliver one drama after the next and, despite numerous parliamentary votes and plenty of news coverage, opinion is still widely divided on the ultimate outcome.
Emerging markets were a key beneficiary of fading recession fears and lower interest rates. The Russian ruble, South African rand and Brazilian real all rallied more than 5% against the US dollar and the MSCI Emerging Market Index was up 8.8% for the month. Listed property was one of the best-performing investments during January as lower rates and a recovering risk appetite combined to drive the MSCI US REIT Index up 11.6% for the month. Brent crude oil also recovered sharply, bouncing by 15% to get it comfortably back above $60/bbl.