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Investors hit the panic button during the fourth quarter of 2018 as indiscriminate selling tumbled markets around the world. This is a regular pattern we have seen reoccurring every few years over the past two decades. The Q4 risk off move impacted prices in all subsectors of the global equity markets, but the carnage was heaviest in the Energy, Information Technology and Industrial industries. Some of the best performing stocks for the first nine months of 2018 ended up being the worst performers over Q4 as investors sold winners to lock in gains before year-end. In December, light volumes and heavy tax loss harvesting further pressured share prices.
Despite the challenging Q4 markets, a few pockets of stability within the Fund provided some ballast. For example, the Fund retains an approximate four percent overweighting to the emerging market (EM) asset class and over the period, EM’s outperformed developed markets by 5.71%. Also, on a sector basis, our tactical overweight to the Healthcare sector provided positive relative performance by holding up better than the broader averages.
On a regional and country-specific basis, our global equity strategy continues to emphasis the U.S. as the best house in a rough neighborhood. Looking around the world, the American economy appears to be more resilient than most other regions and therefore less likely to tip into recession. The same cannot be said of Western Europe, for example where the European Central Bank (ECB) is just beginning to exit quantitative easing programs while at the same time regional growth has been decelerating and the nettlesome Brexit negotiation remains unresolved.
Among non-U.S. regions, we are favorably inclined towards Asia where we maintain exposure to both Japan and China. However, we have been proceeding here cautiously in light of the challenging trade negotiations between the world’s two largest economies. While we are optimistic about a forthcoming trade deal, we understand that risks remain and details will be important. From both a top down and bottom up stock selection standpoint we have been emphasizing quality and defensiveness in our research process as we approach the later stage of the current economic expansion.
Looking ahead, we anticipate one or two more rates hikes in 2019 before the Fed begins to back off. Going forward, we see a potentially rewarding set up for global stock markets in the year ahead. We anticipate U.S. corporate earnings growth of about five percent this year on the back of global GDP growth approaching 3.5%. However, high market volatility is likely here to stay as geopolitics remain disruptive.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
