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CurAlea Associates LLC is an independent risk and due diligence advisory firm focused on hedge funds and family offices.

Wednesday, January 2, 2019

December 2018 - Monthly Market Commentary

December was a difficult month for global risk assets. Developed market equities sold off sharply, emerging market equities outperformed significantly, though were also lower, credit spreads widened, the USD weakened, the oil complex retreated, gold moved higher, and the US interest rate curve flattened and rates declined, except at the very short end. The Federal Reserve increased interest rates for the fourth time in 2018 (and the ninth time since 2015), bringing its benchmark federal funds rate to a range between 2.25% and 2.5%. As forecasted, the ECB’s bond purchase program ended in December, although it will continue to reinvest cash from maturing bonds; the ECB confirmed plans to raise rates in the second half of 2019 and forecasted 2019 euro area GDP growth of 1.7%. The US job report showed that 155,000 non-farm jobs were added in November (the 98th consecutive month of job creation), the unemployment rate held at 3.7% (a 49 year low), the labor force participation rate remained at 62.9%, and average hourly earnings rose 3.1% from a year earlier.

Notable corporate transactions announced in December included the $4.1 billion acquisition of Tribune Media by Nexstar, the $476 million purchase of Jack Wolfskin by Callaway Golf, the $5.1 billion acquisition of Tesaro by GlaxoSmithKine, the $1.8 billion purchase of the remaining components of its IBM’s Lotus business by HCL, the $6.4 billion acquisition of ABB’s power grids business by Hitachi, the $3.7 billion sale of Antelliq to Merck, the $3.2 billion purchase of Belmond by LVMH, the $660 million acquisition of Luxtera by Cisco, the merger of the consumer healthcare units of Pfizer and GlaxoSmithKine, the $275 million acquisition of BuildingConnected by Autodesk, the $1.2 billion purchase of KMD by NEC, Vista Equity’s $1.2 billion purchase of Mindbody, Greif’s $1.8 billion acquisition of Caraustar Industries, Altria’s $12.8 billion purchase of a 35% stake in Juul Labs, Zynga’s $700 million acquisition of a majority stake in Small Giant Games, the $905 million purchase of Pioneer by Baring Private Equity, the $1.8 billion purchase of a 45% stake in Cronos by Altria, the $4.4 billion acquisition of Travelport by Siris Capital and Elliot Management, Tivity Health’s $1.3 billion purchase of Nutrisystem, the $1.9 billion sale of Trade Me to Apax Partners, the $5 billion acquisition of StandardAero by Carlyle, and the $1.4 billion purchase of Civitas Solutions by Centerbridge Partners.
Developed market equities mostly fell in December (see page 8), with gains in Australia (+0.4%) and Hong Kong (+0.1%), and the biggest losses in Japan (-9.8%), the US (S&P 500, -9.1%), and Germany (-6.7%). US large caps outperformed small caps, with the Russell 1000 down 9.1% and the Russell 2000 down 11.9% (see page 3). Utilities (-4%), Materials (-6.9%), and Communication Services (-7.3%) were the best performing sectors in December; Energy (-12.7%), Financials (-11.3%), and Industrials (-10.7%) were the worst performing sectors (see page 2). Large cap value (-9.6%) underperformed large cap growth (-8.6%) in December (see page 3). Emerging market equities were mostly lower in December (see page 9), with the largest gains in the Philippines (+1.8%), Indonesia (+1.4%), and Malaysia (+0.4%), and the largest losses in China (-6%), Argentina (-4.8%), and Thailand (-3.9%).

In currencies, the USD Index was lower (-1.1%) in December (see page 10). The Japanese Yen (+3.5%), Swedish Krona (+2.8%), and Swiss Franc (+1.7%) had the largest gain against the USD, while the Australian Dollar (-3.5%), Canadian Dollar (-2.5%), and New Zealand Dollar (-2.2%) had the largest losses. Emerging market currencies were mixed against the USD, with the largest gains in the Mexican Peso (+3.8%), Thai Baht (+2%), and Chinese Yuan (+1.2%), and the largest losses in the South African Rand (-3.5%), Russian Ruble (-3.1%), and Turkish Lira (-1.4%).

The US interest rate curve flattened in December (see page 12). 10 year rates closed the month at 2.68%, down from 2.99% at November month end. US investment grade and high yield spreads widened in December (see page 13).

In commodities, the GSCI index was down 7.8% in December (see page 11), with losses in Energy (-11.7%), Industrial Metals (-4.2%), Agriculture (-2.4%), and Livestock (-0.6%), and gains in Precious Metals (+5.2%). Within individual commodities, Cocoa (+9.9%), Silver (+9.5%), and Palladium (+4.8%) saw the biggest gains, while Natural Gas (-34.2%), Crude Oil (-11%), and Lean Hogs (-9.5%) saw the biggest losses. Gold was up 4.7% for the month.

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