Capital markets proved to be highly volatile and challenging in the year under review in the face of numerous geopolitical and economic issues. The relatively carefree year enjoyed by investors in 2017 thanks to low interest Rates, low inflation and robust economic growth gave way to a marked shift in sentiment in 2018 against the backdrop of the threat and initiation of tariff and trade wars between the United States and China, the repeated flare-up of concerns around Italy’s stability and the protracted lack of clarity surrounding the outcome of Brexit negotiations. While factors such as the overhaul of international trade agreements and increasing challenges associated with forming a government in Germany had little impact on financial markets in the first quarter, hope of real growth stimuli materialised in the US at the start of the year in the shape of large-scale tax reform. The picture that became evident globally as the year progressed was a nuanced one. While China maintained its growth impetus, central banks in other emerging economies were compelled to adopt a significantly tighter monetary policy in order to protect their currencies. This led to an appreciable softening in the pace of growth and initial price reactions on capital markets.
The German DAX index started the year at 12,918 points and climbed as high as 13,560 points in January – a level which was also its highest for the year. German blue chips began to see their first price corrections over the remainder of the year, unsettled by clouds on the economic horizon and early profit warnings coming out of export-oriented companies. The announcement by the European Central Bank in mid-December to the effect that it would be terminating its purchases of new government and corporate sector bonds at yearend accelerated the downward slide on European stock markets. On 27 December, one day before the close of trading, the German bellwether index sank to its lowest level of the year at 10,382 points. The DAX closed out the final trading day down on the year for the first time since 2011 at 10,559 (-18.3%).
The performance of the MDAX, which entered the year at 26,201 points and touched its highest level of 27,455 on 19 January 2018, was not significantly better. It moved sideways in the months that followed, albeit showing elevated volatility. The MDAX ultimately closed out the year down by 17.6% at 21,588. The S&P 500 and Dow Jones Industrial indices fared less poorly, retreating by 5.2% and 6.7% respectively on the year thanks to support from growth stimuli associated with US tax reform. The MSCI World index ended the year 8.8% lower at 1,920 points.