Stock markets nervous amid increasing geopolitical tensions

Stock-market Cassandras warning of impending danger were a brave species at the start of the year, as Wall Street indices hit fresh all-time highs on an almost daily basis and investors were happy to ignore mounting geopolitical tensions and toppy share valuations.

The bulls had plenty to cheer at the start of the year. US president Donald Trump had got his multitrillion-dollar tax cuts over the line just before Christmas, while International Monetary Fund managing director Christine Lagarde arrived at the World Economic Forum in Davos in late January with news that her staff had upgraded their global growth forecasts for this year and next. The world economy, she said, was enjoying its broadest pace of expansion since the start of the decade.

Lagarde had barely shaken the Swiss alpine snow off her boots and headed back to Washington, however, when stock markets staged a wobble.

The Dow Jones Industrial Average, the best-known US stock market index, plummeted 12 per cent within two weeks, as bond market interest rates – or yields – spiked amid fears that the Federal Reserve would be forced into accelerated rate hikes to stave off an overheating of the world’s largest economy. Escalating US-China trade sanctions were also ratting investors at the time.

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It turned out to be a mere market correction, with global markets picking up in late March following a period of robust corporate earnings and consumer confidence in the US and – closer to home – comments from the European Central Bank (ECB) that interest rates would remain at record low levels through the summer of 2019.

Still, in Europe, banking stocks were out of sorts from March as Italians backed two populist parties in general elections. This resulted in the formation in late May – following 88 days of negotiations – of a new government, raising concerns over the country’s future in the European Union.

Longest bull run

Wall Street led global markets higher into the summer as strong economic and earnings data – particularly from technology groups – outweighed ongoing concerns about the US-China trade war. The US equities market recorded its longest bull run ever on August 22nd, as the S&P 500 reached the landmark of going 9½ years without a fall of 20 per cent or more.

Weeks earlier, iPhone and iPad maker Apple became the first US company to hit a $1 trillion market value, beating Microsoft, Amazon and Alphabet, parent of Google, to the milestone.

However, fellow technology giant Facebook, which had been rattled in March by news that tens of millions of user profiles had been harvested and misused by data firm Cambridge Analytica, saw its shares go into freefall at the end of July – sliding almost 20 per cent in one day – as the social media group posted weak quarterly earnings and signalled that user growth was slowing.

Global stock investors took fright in early October as Federal Reserve chairman Jay Powell signalled a possible more aggressive path for rate hikes, sending US bond yields to eight-year highs.

Nervous investors looking for signals saw plenty of reasons to sell in a month that would earn the moniker "Red October". These included a slowing Chinese economy, a strengthening US dollar, growing tension between Rome and Brussels over Italy's expansionary 2019 budget, and the political ramifications of the murder of Saudi journalist Jamal Khashoggi in Turkey.

In Europe, stocks never fully recovered from the February slump, with the Italian stand-off, shortening odds of a no-deal Brexit, and weakening euro-zone economic data as the year progressed serving to dampen the mood.

While the Irish economy continued to fire on all cylinders – with the Government forecasting that gross domestic product (GDP) would expand 7.5 per cent this year as the State returned to almost full employment – the Iseq spent most of the year on a downward trend as Brexit hung over the market.

With just a day-and-a-half of trading left in 2018, the Iseq has fallen 23 per cent this year, leaving it on track for its worst performance since 2008, when global financial system and economy teetered on the brink of collapse. That compares with a 7.7 per cent drop by the S&P 500, a 14 per cent fall by the FTSE 100 in London and the pan-European eurostoxx 600’s slide of almost 13 per cent.

There were also stock-specific issues in Dublin. CRH, which on its own accounts for a quarter of the Iseq, fell as initial euphoria in April over the group's first share buyback programme in a decade gave way to concerns over the group's rising energy and raw material prices, as well as the impact of severe weather in the US in September.

Another market heavyweight, Ryanair, was hit by volatile oil prices and industrial relations issues as well as a profit warning in early October.

Meanwhile, Irish banking stocks had a torrid year. Aside from the fact that the ECB has deferred until late next year any interest rate hikes (which impacts lenders’ ability to improve their lending margins and profits), Irish banks have been beset by weaker-than-expected mortgage book growth this year and concerns about potential political interference in the sector.

Housebuilders were also out of sorts, with shares in Cairn Homes and Glenveagh Properties hammered by concerns about rising construction costs and a slowing house price inflation as Central Bank's home-loan caps weighed – even though the State continues to grapple with significant undersupply of new homes a decade after the crash.

After a tumultuous year across global markets, analysts and stock pickers are divided over what’s next.

"We are not particularly worried," said Bernard Swords, chief investment officer at Goodbody Stockbrokers, who is predicting a recovery in equity markets in 2019 and a "relatively calm" performance by bonds.

“Economic cycles do not die of old age. There must be a reason for the economy to roll over and usually there are warning signs. Yet across all the indicators – business sentiment, labour market, consumer sentiment – there is no sign of a peak arriving in 2019 for the US economy.”

However, James Sym, a fund manager with Schroders in London, said European investors face challenges in 2019, led by the return of inflation. "Anecdotal evidence tells us that many European companies are facing an increasingly tight labour market, so they may need to pay higher wages to attract and keep employees," he said, adding that manufacturers, having kept a lid on investment in the past decade, will have to start spending again.

BlackRock, the world's largest asset management group, advised clients recently that it expected global growth to slow next year.

“Markets are vulnerable to fears that a downturn is near, even as we see the actual risk of a US recession as low in 2019,” BlackRock strategists said. “This cycle has been a long and shallow one – and still has some room to run in our view.”

Still, they are putting the probability of a recession by the end of 2021 at more than 50 per cent.

Market turmoil hits Irish IPO plans

Turmoil across financial markets served to put the spanner in the works for a number of Irish companies that had ambitions of floating on the stock market in 2018.

In early March, Core Industrial Reit, a fledgling logistics and industrial real-estate trust, decided to pull its planned €225 million initial public offering (IPO), citing "market conditions". It was being lined up as the sixth property-related company to join the Irish Stock Exchange in five years, initially holding almost €83 million of industrial units that US hedge fund York Capital had acquired on the cheap in Ireland in recent times.

In early October, it emerged that Paddy McKillen jnr's Press-Up Entertainment, the State's largest and fastest-growing pub and restaurant group, had decided to mothball its plans for a flotation and had decided to fund its near-term growth ambitions from its own resources.

The company subsequently joined up with a unit of the Rockefeller Group and Dublin-based Core Capital to buy and redevelop the former Clerys department store in Dublin in a deal worth about €63 million.

As equity market volatility continued unabated in October, California-based private equity group Oaktree and Dublin-based Sigma Retail Partners decided to push out a decision on whether to proceed with a retail Reit until 2019.

Oaktree affiliate Targeted Investment Opportunities’ (TIO) purchase of a controlling stake in the Square shopping centre in Tallaght in Dublin from the National Asset Management Agency in February had provided the potential Reit with a “cornerstone” asset.

Early November saw property investment and hospitality group Tetrarch, whose assets include the 764-bedroom Citywest Hotel in Saggart, Co Dublin and stakes in the Mount Juliet hotel and golf resort in Co Kilkenny, Powerscourt hotel in Co Wicklow and Kilashee hotel in Co Kildare, shelve plans for a 2018 IPO, which had been expected to raise between €200 million and €300 million.

Days later, it became clear that US private equity group Lone Star had put its plans for a €300 million-plus IPO of an Irish housebuilder on hold. The company, called DRes, set up in partnership with Durkan Residential's managing director, Patrick Durkan, is understood to control a land bank capable of delivering 6,400 houses and apartments.

T5 Oil & Gas, an African-focused exploration company set up by a group of Tullow Oil veterans, also decided last month to postpone a London flotation as oil prices dived. It is understood that the company, led by executive chairman Pat Plunkett, who chaired Tullow Oil between 2000 and 2011, is considering a back-up plan of selling a stake in itself to a strategic investor.

Meanwhile, former Ryanair finance chief Howard Millar's new aircraft leasing business, Sirius Aircraft Leasing Fund, decided at the start of this month to hold off on its London IPO until early in 2019, saying that some of the "significant investors" that it has lined up were unable to pay up on time for a planned transaction in early December. Sirius aims to raise $250 million (€220 million) before floating to go about buying second-hand plans and lease them on to airlines.

However, some Irish-related flotations did manage to get over the line.

IPL Plastics, formerly One51, raised 178 million Canadian dollars in an IPO and flotation on the Toronto Stock Exchange in June. However, its market value has subsequently fallen by about a third.

The same month, a new Irish real-estate investment trust, Yew Grove Reit, raised €75 million before listing on the Dublin exchange.Its shares are currently trading in line with their €1 IPO price.