It felt bad, but 2018 was hardly the worst showing ever from the stock market.
Indeed I’d give it barely a Sleeps With Wife’s Best Friend on the soap opera scale of drama – perhaps a ‘5’ – where ‘1’ might be Suggests Daughter’s Bum Does Indeed Look Big In That and a ’10’ akin to Dirty Den arising from his grave in the cellar of the Queen Vic to stagger out onto Albert Square wielding a machine gun like a zombie cockney Tony Montana.
On reflection, maybe even a Sleeps With Wife’s Best Friend rating is overdoing it. A global equity tracker fund fell roughly 6% in 2018, in sterling terms, in the year to December 28th.
Granted, that’s not the right direction but we all know shares fall from time to time. A 6% decline is pretty mild.
How was it for you?
You think it felt worse than mild?
I agree, and I can think of a few reasons why.
For starters, the big falls came at the end of 2018. We have long forgotten the pleasure of the earlier gains, but the falling prices are fresh.
Also, the peak-to-trough plunges in many stock markets were much more than 5%, because of that previous climb. If you look at your portfolio more than once a year, you saw a much bigger number become a far smaller one. If you’re silly enough to look at it every day like me, you watched it relentlessly devour several years’ worth of savings. However often you go through this, it’s miserable.
Then there’s the fact that the global fund I mentioned was cushioned by – until recently – stronger returns from the US market. Other regions have been falling for longer.
For instance the UK FTSE 100 is down more than 10% for the year as I write in the last days of December. It’s at levels first seen in the 1990s!
Talk is cheap
Still, all these are just different ways of saying the market fell and it felt rotten.
I suspect the reason 2018’s falls were especially unsettling was because they seemed so detached from company fundamentals.
Sure, some firms are having sector-specific problems.
UK retailers spring to mind.
But it was hard to shake the feeling that politics rather than economics sent your portfolio flying – whether it was a Tweet about China from President Trump, a hawkish comment from a Central Banker, or the British Prime Minister suggesting that yes, the country could undertake a Hard Brexit.
Throw verbal posturing about the yo-yoing oil price into the mix – directly affecting the fortunes of London-listed behemoths like BP and Royal Dutch Shell – and the crash of 2018 seemed a particularly manmade one.
Five bear market bellwethers
Investing is hard enough when you’re concentrating on businesses minding their own business. Throw geo-political posturing in the ring and it’s like four-dimensional chess – or perhaps chess played by WWE wrestlers.
It’s impossible to figure out over the short-term, in other words. This is why we Fools focus on company fundamentals rather than political or macro-economic speculation.
However there is one bright side to a stock market that was arguably taken down by fear. If we avoid a global recession and a full-on trade war – or closer to home, a no-deal Brexit – we might as easily see a bounce. It could go either way in 2019, as a football pundit would say.
Here are five shares that illustrate what I mean.
HSBC (LSE: HSBA)
HSBC is one of the world’s largest banks, with lucrative strongholds across fast-growing South East Asia. Yet its shares trade at a discount to book value and yield over 6%. There are no capital concerns – to me the bank seems pretty bombproof. True, growth has been elusive in the aftermath of the financial crisis, but HSBC is now growing its top line again. Rather, the shares are likely hurting from relentless trade war fears, given HSBC’s exposure to China. If that’s resolved the bank is positioned to benefit. On the other hand if tariffs are ratcheted up then it may look even more of a bargain by the end of 2019!
Land Securities (LSE: LAND)
The shares of the UK’s blue-chip REIT trade at a roughly 40% discount to their net asset value. Is that because the value of its offices and retail outlets are plunging? Not yet – the commercial property giant stated its net asset value fell just 1.4% in its first-half report. Traders seem to be selling the shares ahead of an almighty slump if we see a no-deal Brexit. A well-managed Brexit (or no Brexit at all) could see them rise sharply.
BP (LSE: BP)
President Donald Trump was complaining in early 2018 that oil prices were too high, and pressuring US-ally Saudi Arabia to do something. The Saudis made noises about prices being a bit heady, but then starting in October the oil price crashed 30% and now OPEC and Russia are talking about production cuts. Add in other geo-political factors (including the murder of journalist Jamal Khashoggi and trade war fears) and supply and demand dynamics seem to have gone out the window. In the long-term oil will revert to fundamentals, but over the next year the price is anyone’s guess.
Lloyds Banking Group (LSE: LLOY)
Another one we can blame on Brexit. Lloyds has recovered better than many of the big banks. It’s making plenty of cash, which supports a yield over 6%. However its shares are on a P/E of just under 9, and like HSBC it trades below book value. Nowadays a fully UK focused bank, Lloyds is a play on the British economy, and in particular the housing market – already wobbling due to Brexit worries. With some forecasters warning of catastrophic house price falls in the event of a no-deal Brexit, Lloyds has taken it on the chin. A soft Brexit and a recovery in confidence would surely see a rally.
Severn Trent Plc (LSE: SVT)
Water companies like Severn Trent – and other utilities like Centrica (LSE: CNA) – have been sorry investments in recent years. To some extent that’s justified; Centrica has been losing British Gas customers hand over fist, for instance. But I think there’s a Jeremy Corbyn discount being applied, too. Corbyn has made no secret he’d like to intervene or even nationalise these sectors. As the prospect of Corbyn winning the top job at Number 10 has waxed, at-risk share prices have waned. If Brexit tears the current government apart in 2019, all bets are off. But if we avoid a General Election and Corbyn phobia fades, these shares look oversold.
Here’s to an interesting 2019. Happy new year, Fools!
