Performance, January 2019

08.02.2019

News

Focus on Fed in January

  • As expected, the Fed maintained its interest rate at 2.25%–2.5% at its meeting in January but also signalled that the interest rate may remain unchanged for a period of time. The announcement lifted equities even further and squeezed US interest rates. Yet, the Fed still expects to see solid growth, a strong labour market and inflation around the target at 2%. This points to further interest-rate hikes. But the Fed has also grown increasingly concerned about the slowdown in the global economy with slower growth in the euro zone and China, Brexit and the equity-price declines at end-2018. Due to this concern the Fed will be patient hiking its interest rate until a better overview has been obtained of the new risks. Hence, the Fed follows the historical trend in connection with turmoil in financial markets.

Fear of recession on standby

  • The combination of solid job growth and strong wage increases painted a positive picture of the sentiment in the US corporate sector and of the prospects of the important private consumption. There were no current signs of slowdown in growth, which contributed to reduced fear of US recession among investors. Moreover, we saw a more conciliatory tone in Chinese-US trade negotiations. US trade minister, Wilbur Ross, for instance stated that even though the parties are currently far from agreement, he sees good opportunities of an agreement. The truce will expire on 1 March but he does not consider it a hard deadline as long as we see progress in the negotiations.

Brexit problems and domestic-policy mud-slinging in the US were addressed

  • January was a difficult month for the British prime minister Theresa May. Her Brexit plan was rejected, she did, however, survive a vote of no confidence, but was sent back to the negotiation table with an EU that does not seem willing to back down on any issues. One of the critical hurdles is still the backstop issue. Despite strong concern and large potential economic consequences the financial markets seemed to take it easy on Brexit. The same applied to the shutdown of parts of the US public sector. Although it was the longest shutdown in history, the markets remained calm - and at the end of the months a temporary agreement was in placed.

 

Market return

Strong comeback to global equity markets in January

  • Global equity markets staged a strong comeback in January with an increase of more than 7% after having taking a beating in December 2018. A comeback which meant that the losses from December were almost caught up with. The source of the increases was, for instance, moderate fear of recession since we saw new hopes of a solution to the trade war between the US and China – and a helping hand from the Fed. Consequently, it was primarily cyclical equities which benefited from investor interest. For instance within energy and consumer discretionaries. This demand combined with a generally stronger risk appetite also meant that global emerging equity markets were the top performers, closely followed by the US.

Slower economic growth and falling inflation expectations resulted in declining interest rates

  • The declining interest-rate level from December continued in the first month of the year. This was due to disappointing economic indicators from the European economies, among other things. This prompted the ECB to change its rhetoric at its latest meeting. From seeing a relatively balanced growth picture the central bank now recognises that the risk of slower growth is dominant. Moreover, the US is experiencing a certain slowdown in growth, and further interest-rate hikes from the Fed have no longer been discounted in 2019. Due to the lower interest-rate level 30-year mortgage bonds with a coupon of 2% were trading above 100, and therefore it is no longer possible to obtain new loan offers from this bond series. The same applies to 20-year bonds with a coupon of 1.5%. Foreign investor interest in Danish mortgage bonds is still strong and foreign investors now own 32% of convertible bonds.
  • Emerging market bonds with exposure to local currencies staged a comeback in January 2019 following a very difficult and challenging 2018. The return landed above 5%. A somewhat more moderate Fed and accumulated cash holdings supported the asset class, and investors have after a long break again sent monies into the emerging markets. Emerging market bonds (external debt) had a similar experience with a return of more than 4%. We saw renewed risk appetite with South Africa, Turkey and Argentina and Venezuela and a number of other high beta countries topping the shopping list.    
  • In corporate bond markets, 2019 started with spread widening driven by massive new issues which came very cheaply into the market. The sentiment turned relatively quickly in all financial markets after political news about the US-Chinese trading agreement and reassuring announcements from the ECB and the Fed. Therefore, both high-grade and high-yielding corporate bonds ended up yielding positive returns in January.