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for markets after nearly a decade
of abnormal policy and has had
understandable ramifications for
capital markets, which have been so
distorted by many years of stimulus.”
He adds that rising borrowing costs
in the US have hit bond markets,
pushing 10-year Treasury yields over
3 per cent, which has stoked volatility
in equity markets.
Brian Dennehy, director at Fund
Expert, says alarm bells started ringing
around the bond market earlier this
year: “Back in May, one investment
veteran told me, ‘it’s easier to raise
money than at any time since I have
been in the business over the past 30
years’, and another said new bonds
were offering ‘some of the worst
covenants we have ever seen’. To you
and me, that means they were no good.”
Emerging issues
A more volatile credit market and
more expensive borrowing costs
added strife to what was already a
tough year for emerging markets.
Many of these economies have been
affected by a stronger US dollar,
which has increased the cost of
servicing debt and put pressure on
currencies. South Africa fell into
recession in September while Turkey
hiked interest rates up to 24 per cent.
The rout in emerging markets was
not helped by an escalating trade
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[ 2018 IN REVIEW ]
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Rising borrowing costs
in the US have hit bond
markets, pushing 10-
year Treasury yields over
3 per cent, which has
stoked volatility in equity
markets
war between the US and China.
President Donald Trump announced
in March that he would put tariffs of
up to 25 per cent on $50bn of goods
imported from China, including steel
and aluminium. China responded by
putting its own tariffs on US goods
including soybeans and cars, and
accused Trump of starting the biggest
trade war in economic history.
The long-term impact of tariffs is
not yet known but there are fears
they could weigh heavily on growth
in China, where there are already
concerns about a slowdown.
Darius McDermott, managing
director at FundCalibre, says: “Rising
interest rates support the US dollar
and keep it strong, which is bad
news for emerging markets. Couple
this with the impact they have yet
to feel from the trade-war tariffs and
emerging economies could start
to slow and see inflation pick up.
Long-term investors may like to take
advantage of cheaper share prices,
but they may have to be patient.”
While there is talk of a truce
between the two nations, Hollands
says: “This has clearly unnerved
sentiment and could continue to
ratchet up next year. Tariff rates
on existing goods targeted are
set to be hiked in January and
potentially broadened out to all
Chinese goods if a rapprochement
isn’t reached.”
Political unrest
China and the US are not the only
economies that have been driven
by political rhetoric in 2018. In
Europe, a coalition government
in Italy caused unrest, while
in the UK Brexit has
continued to dominate
the headlines. Amid the
uncertainty, investors
21
number of years from
launch it took Amazon to
become a $1trn company
A more volatile credit
market and more
expensive borrowing costs
added strife to what was
already a tough year for
emerging markets
have continued to flee from UK
equity funds, with net outflows every
month this year. The FTSE 100 has
been insulated from this sentiment
to an extent because it is dominated
by dollar-earners, but a sell-off in
October saw it fall below 7,000.
Hollands says we have “potentially
reached an inflexion point in
markets” and that investors are
feeling wary about the outlook.
However, he points out this could be
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