IRISH LIFE MAPS® FUND PERFORMANCE
Having reached new all time highs in late September, equities fell sharply in quarter 4 ending the year in negative territory, with the global stock market delivering a return of -12.4% in local currency terms (-11.3% in euro terms) over the quarter. This negative performance was mainly driven by a rise in US bond yields reducing the relative attractiveness of equities, fears that the Federal Reserve deciding to continue raising interest rates through 2019 could push the US economy into recession and also concerns around global economic data, particularly in Europe and China.
Other issues which unsettled markets were ongoing uncertainty with the US/China trade dispute, various political tensions and downward revisions to corporate earnings for the first time in a number of years. In contrast Eurozone sovereign bonds rose over the period, benefiting from the increasing concerns over growth and persistence of low inflation, particularly given the sharp fall in oil prices in the fourth quarter.
The table below shows the annualised returns on each of the five Irish Life MAPS funds to the end of quarter 4 2018 since launch (17 May 2013) and over the last 1, 2, 3, 4 and 5 years. Irish Life MAPS is a long-term investment and we would always advise caution when looking at fund performances over time periods of less than five years.
|Since Launch p.a.||2.9%||4.2%||5.8%||7.1%||6.4%|
|5 Years p.a.||3.4%||5.0%||7.0%||8.3%||8.2%|
|4 Years p.a.||2.7%||4.0%||5.3%||6.4%||6.2%|
|3 Years p.a.||2.3%||3.4%||4.2%||5.2%||5.9%|
|2 Years p.a.||1.0%||1.6%||2.1%||3.0%||3.4%|
Source: Moneymate. Gross returns shown to 31 December 2018 before any fund management charge.
ECONOMIC LOOK-BACK Q4 2018
NO NEWS IS BAD NEWS...
Global stock markets hit an all-time high in late September and then fell sharply to finish the year in negative territory. The most obvious reasons were 1) rising US bond yields, making them relatively more attractive versus equities 2) uncertainty over the US/China trade negotiations 3) concerns over global growth 4) various political tensions and 5) downward revisions to corporate earnings. None of these reasons are particularly new and have in fact been bubbling away individually in the background for some time. Combined, however, they are clearly impacting investor confidence and are likely to keep global markets volatile in the short term. At a more local level, the spectre of a no-deal Brexit also looms large. Again, the lack of new news around resolving the border issue left room for investors to speculate and when market sentiment is waning, that rarely delivers a positive outcome.
ITALIAN BONDS BUCATINI PATCH OF VOLATILITY
With European growth under the spotlight and Brexit looming large, the last thing the Eurozone needs to deal with is another internal threat to stability. The Italians spent most of quarter 4 arguing the case for running a budget deficit outside the terms set by the EU. Thankfully, and unusually, it has been resolved quickly easing pressure on Italian 10 year bond yields. In fact, Eurozone bonds in general enjoyed a broadly positive quarter 4 with investors buying due to concerns over lower future growth and low inflation persisting for now.
THE EUROPEAN CENTRAL (S)ANK
The European Central Bank (ECB) has lowered its inflation and growth forecasts for the coming year. They have already informed markets of their intent to end support via asset purchases and start increasing interest rates. In reality, they will almost certainly reinvest maturing bonds back into asset purchases to continue market support and although they indicated that raising rates is not scheduled until at least the end of the summer 2019 but realistically the market thinks it will be closer to mid-2020 when that actually happens.
SHARES, BONDS, COMMODITIES AND CURRENCIES
The MSCI AC World equity index fell -12.4% in the fourth quarter of 2018 in local currency terms (-11.3% in euro). The US fell -13.7% over the same time period (-12.3% in euro) on fears of a possible rate policy mistake on the part of the US Fed and increased political uncertainty into year end. Meanwhile, Europe was down -11.8% (-11.6% in euro) whereas Emerging Markets fared relatively better with a fall of just -7.4% (-5.9% in euro), benefiting from relatively attractive valuations and hopes of an ultimate resolution to the US/China trade dispute. Japan fell -17.1% (-12.8% in euro), being negatively impacted by the stronger Yen which was a drag on exporters. Closer to home, the UK fell -9.7% (-10.4% in euro) with continued Brexit chaos and uncertainty. Finally, the Pacific region outperformed with a fall of just -6.5% (-6.4% in euro).
In Bond markets, the Intercontinental Exchange BofA Merrill Lynch Eurozone > 5 year government bond index rose 1.9% during the quarter. Following the initial rise in the German 10 year yield to 0.57% on the back of the rise in US yields, yields declined to 0.24% by year end as European economic data weakened and inflation remained low.
In currency markets, the euro remained somewhat volatile through the quarter, impacted by the political issues in Italy, Brexit related uncertainty and changing monetary policy expectations at the ECB and US Fed. Over the quarter as a whole it fell to 1.1452 against the US dollar having reached a low of 1.1218. Towards year end the ultimate compromise on the Italian fiscal deficit and talk of a much slower pace of rate rises by the US Fed in 2019 contributed to a modest rebound in the euro.
Commodities fell -22.9% (-21.7% in euro) with WTI oil falling -38.0% despite OPEC (Organization of the Petroleum Exporting Countries) announcing plans for production cuts of 1.2 million barrels per day until June 2019. A rise in oil inventory levels due to increased US production, the granting of exemption waivers for six months to eight countries from the ban on importing Iranian oil and reduced oil demand forecasts due to concerns over slower growth all contributed to the sharp fall in the oil price.
Source: David Haslam, Head of Retail, Irish Life Investment Managers (ILIM), 31 December 2018.