The value of investments, and the income from them, will fall as well as rise and you may not get back the original amount you invested. Where any performance is mentioned, please note that past performance is not a guide to future performance.

Market data

Regional performance – December 2018 Global sector performance – December 2018

Earnings yield Value (B/P) ROE ROIC Risk (Beta) Momentum

US Europe Japan Emerging Markets

Far East ex. Japan

Global UK

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Total returns (%)

MSCI AC World FTSE All-Share S&P 500 MSCI Europe MSCI Asia Pac x Jap MSCI EM

GBP

EUR

USD

Valuation (P/B)

(P/E)

(P/E FY1)

Global Equities: Last month was the worst December on record for global equities and 2018 was the sixth worst year. The US was the worst performing region in December as investors considered the possibility that the US economy would join the global slowdown. All regions posted negative returns for the month. From a sector perspective, utilities had the largest positive performance rotation during the year, joining healthcare as the two best performing sectors. Energy was the worst performing sector as oil lost ground over the month. Style performance was more mixed, with risk underperforming across nearly all regions. UK: Uncertainty over Britain’s exit from the EU continued to cast a cloud over the UK stock market, with the FTSE 100 touching a two-year low in December.

Europe: Lingering worries about slowing corporate earnings and economic growth hurt the region during the month, along with the ongoing Brexit saga. US: The S&P 500 had its worst December performance since 1931. Investors were concerned by an economic slowdown and fears that the Fed might be making a monetary policy mistake. This was further exacerbated by a government shutdown. Interest rates rose by 25bps during the month. EM/Asia ex Japan: China’s slowing economy and trade tensions continued to weigh on the region. China was the world’s worst-performing stockmarket in 2018, while the strong dollar had adverse consequences for the emerging markets region as a whole during the year. Other: Crude oil slumped to its first annual loss since 2015, whilst safe haven gold was one of the best performing assets in December.

Dec 1 year Dec 1 year Dec 1 year Dec 1 year Dec 1 year Dec 1 year

2.0x 1.5x 3.0x 1.6x 1.5x 1.5x

14.5x 11.0x 16.3x 12.9x 11.7x 11.3x

13.8x 11.9x 15.6x 12.7x 12.1x 11.2x

-6.8 -3.3 -3.7 -9.5 -8.9 1.6 -4.4 -9.0 -2.6 -8.3 -2.4 -8.9

-7.9 -4.3 -4.7 -10.3 -9.9 0.4 -5.5 -10.0 -3.7 -9.3 -3.5 -9.9

-7.0 -8.9 -3.9 -14.8 -9.0 -4.4 -4.6 -14.3 -2.7 -13.7 -2.6 -14.2

Style update: what’s in vogue? One year

Source: Macquarie, as at 31 December 2018. Long minus short portfolio – ex-financials (market cap weighted).

Source: Datastream, 31 December 2018.

Equities market perspective Ritu Vohora – Investment Director

For Investment Professionals only

January 2019

Dec

1 year

Market summary

Aus. Dollar Yen Swiss franc Euro US Dollar

Emerging Markets

Asia Pacific ex. Japan

UK Europe Japan Global US

Util

ities

Mat

eria

ls

Real

est

ate

Com

mun

icat

ion

serv

ices

Cons

umer

st

aple

s

Cons

umer

di

scre

tiona

ry

Tech

nolo

gy

Indu

stria

ls

Fina

ncia

ls

Hea

lthca

re

Ener

gy

-3.4% 2.9% 1.5% 1.0% -0.1%

-4.3% 7.6% 5.4% 1.5% 6.5%

Currencies: percentage change over month and one year (Majors vs GBP)

Source: Datastream & Factset, MSCI indices, S&P indices for the US, as at 31 December 2018.

-2.4% -2.6%-3.7%

-4.4%

-6.5% -6.8%

-8.9%

-1.7%

-3.2%-4.6%

-5.8% -5.9%-6.8%

-7.4% -7.7% -7.7% -7.9%-8.8%

INVESTMENTS

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Key points

• FTSE 100 tumbled 12.5% in 2018, its biggest fall in a decade, as Brexit and trade tariffs spooked investors

• Despite significant changes, the index has offered decent performance since its launch on 3 January 1984, up 573%

• The index looks significantly different from the 1980s – only 27 of the original companies are in the index today

• Brexit discount – UK assets are very cheap vs history and relative to other global markets

Market volatility over the past year is exemplified by the FTSE 100, which hit a record high of 7,877 points in May before touching a 28-month low in December. While the headlines have focused on the index tumbling 12.5% in 2018, its biggest fall in a decade, the 3rd of January also marked the index’s 35-year anniversary. Its membership has changed quarterly as the fortunes of constituent companies have risen and fallen.

After a turbulent year, it is helpful to step back and look at what you are investing in. The FTSE 100 looks significantly different from

the 1980s: only 27 of the original 100 Great British companies are still in the index today. These include Barclays, BP, GlaxoSmithKline, Marks & Spencer and Unilever. Despite significant changes, the index has offered decent performance, with a price return of 573%

since 3 January 1984.

The changing list of constituent companies mirrors significant shifts reflecting the global economic revolution – from industrial might to digital creativity. Industrials was the largest sector in 1985, accounting for almost 24% of the index compared to just 7.8% today. The technology sector did not even exist back then.

The FTSE 100 has also evolved from a UK-centric index to one that represents the global economy. Many constituents are internationally focused companies, with more than 75% of index revenues derived from overseas. The index's movements are therefore a weak indicator of the country’s corporate health and how the UK economy is faring, and are significantly affected by the exchange rate. A better indication of the UK economy is the more domestically focused FTSE 250 Index.

The FTSE 100’s overseas exposure offers investors a natural hedge against a decline in sterling. In the three months after the Brexit vote, the FTSE 100 advanced 10% as sterling plummeted 12% relative to the dollar. Yet recently this correlation has broken down, in part due to higher local inflation and rising interest rates abroad. Sterling remains a key risk for UK investors as we approach the Brexit deadline.

There will be volatility ahead, but valuations have priced in a significant amount of bad news and an implicit Brexit discount. UK assets are now very cheap, both versus history and relative to other global markets. Arguably this presents a once-in-a-generation opportunity to find good quality companies at bargain valuations. It’s important to take a long-term view and focus on fundamentals.

The main risk is around earnings disappointment, with the FTSE 100 offering a current dividend yield of 4.8%, which is at historical highs. If earnings hold up, however, there could be plenty of upside. In the event of a ‘hard’ Brexit or ‘no deal’ scenario, a further collapse in sterling could help propel the FTSE 100 higher, given its relatively low domestic exposure. In the event of a ‘soft’ Brexit, the index could enjoy a relief rally as some uncertainty is lifted.

The lesson of the FTSE 100 over the past 35 years is that the future rarely turns out as we imagined, and companies that seem permanent rarely turn out to be that way. Companies are bought, merged, or simply fail, while new companies emerge to take their place. The key is to take an active approach and gain exposure to a diversified mix of assets, and not become too fixated with single or localised issues – including Brexit.

Theme of the month: FTSE 100 celebrates 35 years – a bargain opportunity?

FTSE 100 derives over 75% of revenues from overseas– exposure by geographic revenue vs domicile

UK

USMainland China

Japan

Germany

Hong KongSingapore

France

Other

Outer: primary revenue 23.4% UK

Inner: primary domicile 99.0% UK

Source: Factset, FTSE 100 index, 31 December 2018.

0

5

10

15

20

25

%

Fina

ncia

ls

Oil

and

gas

Cons

umer

good

s

Hea

lthca

re

Cons

umer

serv

ices

Basic

mat

eria

ls

Indu

stria

ls

Tele

com

s

Util

ities

Tech

nolo

gy

FTSE 100 sector evolution

1985

2018

Source: Factset, FTSE 100 index, 1 January 1985 and 31 December 2018.

UK vs world looks cheap

-20-15

-40

-25-30-35

-10-505

%

75 80 85 90 95 00 05 1510

Source: Man GLG, December 2018.

UK vs MSCI World (avg % premium on PE, PBV and PD)Median

For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776. JAN 19 / 335803

Where any performance is mentioned, please note that past performance is not a guide to future performance.

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INVESTMENTS