The final months of 2018 were testing times for investors as volatility surged and global share markets fell. Familiar themes continued to make markets nervous – ongoing trade tensions, slowing global growth, US interest rates and falling oil prices.
But news the US Federal Reserve would put its three-year interest rate rise campaign on hold, propelled world stocks to their best January on record; the MSCI world index, which tracks 47 countries, was up more than 7% for the month, its best January performance since the index began in 1990.
Testing times ahead
Despite a strong start to the year, you don’t have to look hard for political tensions that could spook markets in the year ahead.
In the US alone, tense negotiations over border security – which has already led to the longest government shutdown in US history with threats of further shutdowns if president Trump fails to get funding for his border wall – as well as ongoing global trade negotiations, could spark turmoil on Wall Street.
In the UK, Brexit continues to loom as an issue for European markets; and at home, a federal election and falling property prices are cause for concern.
China poses headache for tech stocks
A slowdown to economic growth in China is another key threat to global markets. After decades of expansion, the world’s second largest economy is slowing, with 2018 set to be its weakest year since the 1990s.
Chinese demand is crucial for tech companies and Apple CEO Tim Cook told investors that revenue would be lower than expected.
Apple stock dropped 8%, on 3 January, wiping nearly $55 billion off of the company's market value before recovering to post a 5.5% climb for the month.
2018 by the numbers
Global equities fell by more than 13% over the final three months of 2018, including an 8% drop in December. US benchmark indices the S&P 500 fell 7% for the year and the Australian sharemarket recorded its worst yearly performance since 2011 with the S&P/ASX 200 falling almost 7%.
Superannuation funds also recorded their lowest returns since 2011 but managed – just – to end the calendar year in positive territory.
The latest data from superannuation research house SuperRatings, reveals major fund categories all suffered declines in December 2018.
SuperRatings Executive Director Kirby Rappell says returns for “Balanced” options – with exposure to growth assets of between 60% and 76% – fell nearly 5% in the final three months of 2018. But they eked out a small gain of 0.6% for the calendar year.
Mercer Growth returned 04% for the calendar year while Mercer SmartPath options for customers aged 55 and over also ended the year in positive territory with returns ranging from 0.4% to 1.4%.
“Volatility is likely to be a feature of markets over the coming months and members can expect ongoing fluctuation in returns,” Rappell says.“However, it’s important to keep a long-term perspective and recognise that super returns have been overwhelmingly positive over the last decade.”
He says despite the declines, super members remain well ahead over a ten-year period, with $100,000 invested in the median Balanced option in December 2008 now worth $204,264.
Global economy to grow
The International Monetary Fund expects the global economy to grow by 3.5% in 2019 and 3.6% in 2020, a touch below its October estimate of 3.7% for both years.
In its latest World Economic Outlook, the IMF warns risks to global growth include tightening interest rates, trade tensions between the United States and China, a possible "no deal" exit by the UK from the European Union and a deeper than expected slowdown in China.
‘Don't panic' is a good advice
With so many political hotspots, dramatic headlines and short-term market volatility are inevitable, but these should not prompt ‘knee jerk’ decisions that might damage your longer-term objectives.
While it's not easy to hold your nerve as you watch share markets plunge there are sensible actions investors can take based on sound, long-term principles: keeping a cool head and embracing diversification are chief among them.
Mercer Financial Advice
If market volatility is causing you concern, talk to your local advisor now. Mercer Financial Advice has seven offices across Australia – Melbourne, Glen Waverley, Sydney, Paramatta, Brisbane, Adelaide and Perth.