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2018 market moments

Read our market analysts' thoughts on some of the key moments of 2018 and how they have affected different sectors.

The pressure on the retail sector has been on investors’ minds since the end of the financial crisis, and this year we’ve seen some rather mixed messages. Since the end of last year, consumer activity has improved, mostly in line with the slow decline in CPI inflation from peaks of 3.1%. Wage growth has also slowly improved over time, from 1.7% in mid-2017 to 3.2% in 2018. But 2018 has also been a difficult year for retailers. We’ve seen companies like Maplin go under, John Lewis has struggled, while Carpetright, Debenhams, Dunelm, House of Fraser and Mothercare have all issued profit warnings. Meanwhile, the growth in headline numbers from a disappointing 2017 appears to have been encouraged by heavy discounting, as well as the erosion of retailer margins, which has claimed a number of high profile victims. While there have been some success stories, the sector is likely to remain vulnerable to further shocks in the weeks and months ahead, irrespective of the upcoming Brexit denouement. Nevertheless, a benign Brexit outcome is likely to be preferable for retail, if only for the sake of preserving consumer confidence. Read full retail article

In 2016 the pound had its worst year since 2008, falling 16% against the US dollar (GBP/USD) and 11.5% against the euro (GBP/EUR). The pound was able to find a semblance of stability in 2017, and the agreement last December in terms of the withdrawal agreement and trade talks with the EU, helped underpin a positive move for sterling as we moved into 2018. It has remained a somewhat tumultuous year for the pound however, with the risk of Brexit keeping sterling weak. Furthermore, economic recovery in Europe has stalled and gone into reverse; Germany’s Angela Merkel could well be gone by the end of the year, while the new populist Italian government appears to be keen to take on Brussels with respect to its budget, and France’s President Macron is fighting fires at home with riots in Paris. Against the Brexit backdrop, the outlook for sterling remains fraught. A positive outcome or development in Brexit talks will benefit the pound, and would probably see heightened expectations for an interest-rate rise in the coming months. Read full GBP article

The US economy has seen a significant boost this year, culminating in a Q2 GDP print of 4.2% in the summer. As a result of this stimulus, the Federal Reserve followed up its three rate rises in 2017 with another three this year, with the potential for a fourth. However, the strong surge in the US economy has disguised the growing realisation that the global economy was starting to show signs of slowing. This has once again raised the prospect of what we saw at the end of last year – a flattening yield curve when US short-term rates rise to meet US longer-term rates – flattening out the differences between the different periods. 2018 got off to a fairly decent start as yield differentials widened out. However, since the sharp sell-off in equity markets in early February, and in the wake of the tax cuts announcement, yield differentials have slid back sharply, heading towards zero. As we look ahead to next year, there are important questions about the direction of central bank policy. While most of 2018 has been centred on how much central banks will continue to pull back, the direction of the yield curve would suggest that any further tightening seems highly unlikely. Read full bonds article

The rebound in oil prices that started way back at the beginning of 2016 finally ran out of steam when prices hit a four-year peak just shy of $87 a barrel in October, with many forecasts predicting a move towards $100 a barrel. The main driver behind the summer move above $72 a barrel, and then $80, was the unilateral US decision to reimpose sanctions on Iran. The share prices of the main oil companies Royal Dutch Shell and BP, however, have spent most of this year underperforming relative to the wider benchmark, despite posting rising revenue and profit. But looking ahead to 2019 and the companies’ prospects, the outlook still remains positive. Both have made decent progress in terms of their gas businesses and in cutting costs, although more progress needs to be made. The biggest concern remains around BP, given its high debt levels and wafer thin dividend cover, which make it vulnerable to an economic slowdown or a drop in demand. Both are likely to face problems going forward as the move away from oil consumption towards renewables and biofuels, in order to deal with climate change, becomes more mainstream. Read full oil and gas article

Having made modest gains in 2017, UK banks have come under pressure this year, with European banks similarly underperforming. The biggest problem for UK banks is the outcome of the Brexit negotiations, along with uncertainty about the strength of the global economy, which has started to show signs of misfiring. While banks might have had a bad year for profitability, in terms of market volatility and business activity, 2018 hasn’t been all bad. Royal Bank of Scotland returned to profit this year for the first time since it was bailed out. Lloyds, on the other hand, of all the UK banks, is particularly exposed to the UK economy and a messy Brexit outcome, which helps explains its continued poor performance despite posting a record half-year profit of £3.1bn in June. Barclays’ CEO Jes Staley’s attempts to turn around its fortunes have been mixed at best. The worst performer last year, it has fared no better this year, though profit and revenue do appear to be starting to show signs of life. The performance from HSBC has been disappointing, given that of all the UK banks it is probably one of the more resilient given its geographical diversity. The next few weeks are likely to be key in terms of predicting the future performance of UK banks, with a positive Brexit outcome likely to prompt a strong rally in bank share prices. Continued uncertainty is likely to keep prices in the doldrums. Read full banking article

The food retail sector has undergone a tough few years recently, as hard-pressed consumers turned to lower-cost retailers. Aldi and Lidl have seen their combined market share grow to challenge the likes of Sainsbury’s and Asda, while also jumping ahead of the more established players like Co-op and Waitrose. To turn things around, supermarkets have focused on diversification, along with a much keener focus on costs and on the types of products customers want. Tesco finally completed the £3.7bn acquisition of wholesaler Booker earlier this year, though so far we’ve seen little tangible benefit of that deal in Tesco’s overall profit. Sainsbury’s share price has had a decent year, though most of that gain has been as a result of the announcement in April that the business was looking to merge with Asda, though the deal remains a long way from being confirmed. The recovery in Morrisons’ share price in the past two years has appeared to be running out of steam since August, with several short sellers starting to build large positions. While the continued expansion of Aldi and Lidl is pressuring margins, there appears to be some signs that the supermarket sector is more able to pass on price increases than it has been in the last three years. Read full food retail article

Homebuilders had a strong start to 2018 as a combination of low interest rates, accommodative mortgage polices and the help-to-buy scheme all helped keep demand robust. While the industry shook off the doom and gloom projections related to Brexit, the housing market has begun to show signs of cooling, particularly in London and the south east. The sudden collapse of Carillion at the start of the year sent shockwaves through the construction sector, but the industry made a quick recovery. The average growth reading year-to-date wasn’t too different from the readings in 2017, although while the sector is still growing at a respectable rate, it has certainly cooled from the 2014-2015 era. Berkeley Group fared the best of the bunch as its share price only dropped 21%. The company posted a 15% rise in annual profit in 2018, as revenue slipped by 1.09%. Taylor Wimpey was the worst of the group as its shares lost 36%. Analysts are optimistic in their outlook for the stock however, as they expect revenue and net income to increase by 3.9% and 5.45% respectively. Looking ahead, demand for houses might cool in the first quarter of 2019, as some potential buyers might hold off from making such a big investment while the UK prepares to leave the EU. Interest rates are still at rock bottom levels and mortgage rates are competitive, so provided there isn’t a disorderly Brexit, demand should remain stable. Read full homebuilders article

In 2017, financial markets were caught up in a magic cryptocurrency bubble as investors piled into anything connected with blockchain technology. This crypto mania saw the price of the four main cryptocurrencies surge, along with a whole host of other initial coin offerings in 2017, before spectacularly imploding earlier this year, wiping out a lot of unwary investors and speculators in the process. Apart from the occasional rally, it has continued to burn fingers consistently along the way, in a fashion that has seen investors look elsewhere for investment opportunities. They didn’t have to look far, as coming off the back of a crypto high, markets turned their attention to cannabis stocks, as governments around the world started to look more closely at the medicinal qualities of cannabis and other variants. The drug has already been fully legalised in California, while medical marijuana has been fully legalised in 31 other US states. Earlier this year, Canada became the first G7 country to legalise the recreational use of cannabis across the country, and it is predicted that the industry could be worth $22bn by 2022. As with any spawning and developing industry, we have seen and are likely to continue to see significant growing pains. This has taken the form of eye-watering volatility in the share price movements of a host of publicly listed companies that are looking to do business in this area. Read full crypto and cannabis article

Mergers and acquisitions

2018 saw a lot of volatility in terms of stock market price action. In the first quarter, several of the major indices racked up fresh all-time highs, while many reached multi-year highs. With the exception of the major US indices, stock markets around the world began to retreat in the second half. The outlook for the global economy was looking better in the first half than it is now, and some investors saw the declines in stocks in recent months as an opportunity to buy into the market. Several companies caught up in the bullish sentiment, snapped up other organisations, or merged with them to form a more powerful company. Looking ahead, with global stock markets off their highs, and some concerns about global growth, 2019 is likely to start off on a softer note. The landscape has changed greatly in the past 12 months as political uncertainty in Italy, strained trade relations between the US and China, Brexit, and the odd whisper about a possible rescission in the US, have dampened the previously bullish sentiment. Many deals are paid for with debt, and companies might be cautious about loading up on debt for fear we are heading into economically cooler times. Read full mergers and acquisitions article

Travel

The travel sector has endured a turbulent year. Soaring oil prices through the summer and into the autumn, industrial action at certain airlines, extreme weather, uncertainty surrounding Brexit, and weakened consumer confidence all weighed on the industry. Ryanair shares were hit by a profit warning in October as the group lowered its full-year guidance to between €1.1bn and €1 2bn, when the pervious guidance was between €1.25bn and €1.35bn. Comparatively, in November, easyJet posted a 41.4% increase in full-year pre-tax profit to £578m – which was at the higher end of the £570m to £580 million range that the company announced in September. Overall, the travel sector had a difficult 2018, and given the concerns about global growth, a slight decline in consumer appetites and uncertainty surrounding Brexit, the industry is likely to have a downbeat start to 2019. On the plus side, the oil price has dropped considerably, but that might be irrelevant if firms have locked in their exposure already. The drop in the oil market is also a reflection about worries of a slowing economy. Read full travel article

 

 

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