In December markets experienced more along the themes of trade war, corruption in both the private and public sector, retribution, and the resultant drag on economic growth. The 2019 returns are looking strong, though.
Years of fiscal consolidation - cutting expenditure and raising revenue mainly through tax increases, have failed to deliver the desired outcome. The risk is that bond market participants decide the government is not in a position to run a surplus and that the upward debt trajectory is heading into runaway territory. If so, they would dump government bonds, signaling the onset of a debt trap. Fortunately, we are not at this point at present and the government has options.
Trade tariffs, which came into took effect on September 1, set the tone for financial markets for the rest of the month. Nevertheless stock markets still managed to end the month in the black, brushing off geopolitical tensions and worsening economic statistics, which highlighted the adverse impact the trade war was having on global growth.
Developed country stock markets were notching up steady gains until the last day of the month when the US Federal Reserve upset markets by putting paid to market expectations that a 25-basis point rate cut may be the beginning of an aggressive rate-cutting cycle. Developed market stock markets still managed to gain ground for the month but emerging markets lost ground.
Derivatives are often associated with complexity, risk and leverage but in reality they allow fund managers to put in place insurance that protects investments against downside risk. Used for hedging, they are particularly useful in times of great volatility and uncertainty, like now.