“2018 has been very different from 2008 or 2000,” says Chief Investment Officer Yves Bonzon in his video outlook. Instead, he draws parallels with the situation in 1987, when markets recovered rapidly after a sudden correction.
Lesson #1: An unusual year
As 2018 is drawing to a close, before planning for 2019, it is important to reflect on what happened. What are the lessons learned from 2018? This was in many ways a very particular year. One of the main developments was unlike previous market episodes when bond markets were leading equities. This year, equity markets led credit and treasury markets – an unusual pattern investors are not familiar with.
Lesson #2: Market drivers in 2018
What were the actual drivers in markets this year? Below the surface, the main market driver was the policy shift towards monetary normalisation and fiscal stimulus in the US. That led to a significant adjustment in the cost of capital, with yields rising. But this phenomenon was actually unique to the United States. In other parts of the world – in Europe in particular, but in China as well – interest rates came down. The tightening of liquidity by the US Federal Reserve though, triggered a broad increase in asset yields. At the same time, that endogenous driver was very difficult to read because we had the extra factor of the China-US trade tensions. This is sort of a permanent external shock that further complicated the market reading for investors.
Lesson #3: 2018 is not a repeat of 2008
Going into 2019, we think the most crucial aspect for investors to understand is that what they experienced this year in the markets is not a repeat of 2000 or 2008. Circumstances are different. We would rather draw parallels with a year like 1987, when rates went up from 7 to 10 per cent in the US, markets peaked in August, then started a correction that turned into a market crash driven by portfolio insurance, finally bottomed out in October and slowly recovered in the subsequent year.