Quarterly market summary 4th Quarter 2018

POOLED PENSIONS Quarterly market summary 4th Quarter 2018 Economic overview As the quarter progressed, investors became increasingly concerned about the outlook for the world economy. The perception was that the combination of a trade war between the US and China and tighter monetary policy could stifle growth. During the quarter, the US Federal Reserve (Fed) increased interest rates by a quarter of a point and the European Central Bank (ECB) confirmed it was scaling back its monetary stimulus. On the other hand, the Bank of Japan continued with its policy of quantitative easing. In commodity markets, the oil price fell on the expectation of weaker demand and a sense that planned output cuts by major producers were insufficient to allay concerns about oversupply. Meanwhile, in currency markets, the yen strengthened on the back of its perceived safe-haven status, while sterling weakened over fears over a hard Brexit. Real GDP growth (%) 4.0 3.7 3.7 3.5 3.5 2.9 3.0 2.6 2.4 2.5 2.2 1.8 1.9 1.9 2.0 1.5 1.6 1.5 1.3 0.9 0.9 1.0 0.5 0 World UK US Eurozone Japan 2017 Estimate 2018 Forecast 2019 Source: Bloomberg Consensus Global Rate Forecasts, 2 January 2019 Market overview There was a broad sell-off in stockmarkets in the final quarter of 2018, as investors became increasingly alarmed over weaker-than-expected economic data out of the US, European Union and Japan, an ongoing trade war between the US and China and generally less supportive monetary policy from the world s central banks. As a result, several stockmarkets have hit, or nearly hit, bear market territory that is, they have fallen by 20% or more from their peak. Indeed, when you consider the percentage of global assets that have delivered a negative total return year to date, 2018 is set to be one of the worst years on record for returns across a broad spectrum of assets. Equity market performance v. FTSE World Index (4th quarter 2018) Asia Pacific (ex Japan) Japan (1.5) Europe (ex UK) North America UK (0.7) 0 0.7 4.4 Emerging markets 5.7 (2.0) (1.0) 0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 (%) Source: Thomson Reuters Datastream Sterling UK equities In common with other stockmarkets around the world, UK shares suffered major falls during the quarter. Little progress was made over the form of the UK s withdrawal from the European Union, and this weighed on the pound. In the past, pound weakness supported the exporting companies that make up a large proportion of the FTSE Index, but the significant weakness in the oil price in the fourth quarter led to lower share prices for energy companies. Still, the FTSE did outperform the more domestically focused FTSE 250, whose members are seen as more exposed to a hard Brexit. In addition to Brexit, investor sentiment was dented by higher US interest rates, trade tension between the US and China and signs of slowing global economic growth. UK equity market indices (12 months to 80 FTSE All-Share FTSE Mid 250 FTSE Small Cap FTSE Source: Thomson Reuters Datastream Rebased to

2 QUARTERLY MARKET SUMMARY UK bonds UK government bonds (gilts) delivered positive returns in the final quarter of 2018 as ongoing Brexit uncertainty coupled with fears of a slowing global economy helped support demand for traditional safe haven assets. Gilts also benefited from a drop in UK inflation, with 10- year gilt yields falling from 1.6% at the end of September to below 1.3% at the end of the year. As widely expected, the Bank of England kept interest rates unchanged at 0.75%, with policymakers warning that UK growth would likely slow in the final quarter of 2018. It proved to be a more challenging period for UK corporate bonds as the general downturn in sentiment held back returns. Gilt indices (12 months to 104 102 98 96 94 Under 5 years 5 to 15 years Over 15 years Source: Thomson Reuters Datastream Rebased to UK property UK commercial property delivered a solid performance in 2018; however, the overall return was somewhat lower than last year. Nevertheless, UK commercial property was one of the few asset classes to close out 2018 in positive territory. Growth in capital and rental value continue to be strongest in Industrials, driven by demand for well-located fulfilment centres and smaller distribution units. Conversely, capital values in the Retail sector fell in every quarter, reflecting the challenging trading environment. Looking ahead, we expect UK commercial property to generate mid-single-digit returns over the medium term, with rental income representing a significant proportion of returns. The investor market remains healthy, buoyed by overseas demand, following the decline in sterling. Within the market, investors are attracted to quality assets that display resilience, provide increasing rental income, and can adapt to an evolving economy. Equivalent yields (to 30.11.18) (%) 11 10 9 8 7 6 5 4 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 All Property Retail Office Industrial Source: IPD International bonds While global economic growth forecasts were generally reduced during the fourth quarter, higher US interest rates remained a key theme in global fixed income markets. As expected, the US Fed confirmed a rise in interest rates of 0.25 percentage points in December, its fourth rate increase in 12 months. In addition, international trade tensions continued to weigh on sentiment, with the imposition of tariffs between the US and China staying a main concern. This factor, plus the slower global economic growth outlook, contributed to declines among corporate bonds and emerging market debt. However, the performance of core government bonds benefited from their perceived safe-haven status among investors. This helped segments of the government debt markets in areas such as the US, Germany and UK, to deliver modestly positive returns despite the Fed s tighter monetary stance. 10-year government bond markets (12 months to 104 102 98 96 94 92 Germany UK US Japan Source: Thomson Reuters Datastream Rebased to Local currency

QUARTERLY MARKET SUMMARY 3 North America Despite the major US stockmarkets entering the fourth quarter at record highs, a succession of worrying events soon caused sharp falls in share prices. Investors became concerned the Federal Reserve s policy of increasing interest rates might stifle economic growth, while a possible trade war between the US and China could hamper global economic activity. A major fall in the oil price was another negative factor. Late in the review period, political uncertainty increased as the US government suffered a partial shutdown as financing could not be agreed by politicians. Technology stocks, which have been particularly strong in recent years, fell back as their earnings may come under pressure from reduced global trade. Although US markets rallied in the last full week of the year, this was not enough to make up for earlier falls. The Canadian stockmarket also declined, reflecting the weakness in the US. FTSE World North America Index (12 months to 115 110 Source: Thomson Reuters Datastream Rebased to Europe European stockmarkets were turbulent in the fourth quarter as a combination of factors dampened investor sentiment. Company share prices fell to the lowest level in two years amid worries about a slowing global economy, trade tensions between the US and China and falling oil prices. The Italian government s dispute with the European Union (EU) over its finances and uncertainty about the UK s departure from the EU, or Brexit, also unsettled investors. At the same time, the European Central Bank confirmed it was scaling back its economic stimulus efforts, despite signs of weakening growth in the eurozone. Against this background, stockmarkets in Austria, Ireland and Norway were the biggest fallers. In contrast, markets in Spain and Switzerland were relatively resilient. FTSE World Europe (ex-uk) Index (12 months to Source: Thomson Reuters Datastream Rebased to Japan Japanese equities suffered large losses in the fourth quarter, bearing the brunt of trade war concerns between the US and China, and the prospect of tighter global monetary policy. However, it is worth noting that at this juncture, the Bank of Japan is one of the few major central banks still engaged in quantitative easing through the purchase of assets. Shares were also battered by a strengthening yen, which benefited from its status as a safe-haven currency. A stronger Japanese currency can reduce the value (in yen terms) of the overseas revenues and profits of Japanese companies. While the risk-off environment was a headwind for the Japanese stockmarket, corporate Japan continued to report largely positive quarterly numbers. FTSE World Japan Index (12 months to 110 80 75 Source: Thomson Reuters Datastream Rebased to

4 QUARTERLY MARKET SUMMARY Pacific Basin ex-japan Stockmarkets in Asia Pacific ex Japan fell in the quarter amid concerns about trade tensions between the US and China and the outlook for the global economy. Another increase in US interest rates also dampened investor sentiment. China s stockmarket declined on worries about the impact of tariffs on the country s economy. Trade concerns also weighed on share prices in South Korea and Taiwan, while Taiwanese technology firms were hurt by concerns about demand for Apple iphones. Stockmarkets in Australia and Thailand lagged too. In contrast, India was one of the best performers. Lower oil prices are helpful for the country s economy, as it is an oil importer. Indonesia also performed well, recovering from declines earlier in the year. FTSE All World Asia Pacific ex Japan (12 months to Source: Thomson Reuters Datastream Rebased to Emerging markets Emerging market stocks extended their recent decline over the last quarter of 2018, although they outperformed shares in developed markets. Worries about the trade dispute between the US and China, slowing global economic growth and higher interest rates in the US contributed to increased risk aversion. China s stockmarket declined amid concerns about the impact of tariffs on the country s economy. Uncertainty about global trade weighed on share prices in South Korea and Taiwan too. In Mexico, the stockmarket fell on concerns about the new president s economic policies. In contrast, Brazilian share prices rallied as investors welcomed the outcome of the country s presidential election. Turkish stocks recovered some of their losses from the previous quarter, while India s stockmarket also performed well, supported by lower oil prices. MSCI Emerging Markets (12 months to 110 Source: Thomson Reuters Datastream Rebased to Please note that the views on markets expressed in this report are those of M&G as at 31.12.18 and should not be taken as investment recommendations. Past performance is not a guide to future performance. 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.

QUARTERLY MARKET SUMMARY 5 Market data 4th Quarter 2018 % 12 months to 31.12.18% Local Sterling Local Sterling Equity index total returns* FTSE World -12.7-10.9-7.1-3.1 FTSE All World ex UK -12.6-10.6-7.3-3.1 FTSE All-Share -10.3-10.3-9.5-9.5 FTSE -9.6-9.6-8.7-8.7 FTSE Mid 250-13.3-13.3-13.3-13.3 FTSE Small Cap -10.4-10.4-9.5-9.5 FTSE World Europe (ex UK) -11.8-10.9-10.7-9.5 FTSE World France -13.6-12.9-7.1-6.1 FTSE World Germany -14.0-13.4-17.5-16.6 FTSE World Italy -10.9-10.2-12.7-11.7 FTSE World Spain -7.2-6.5-11.8-10.8 FTSE World North America -13.4-11.6-4.7 0.8 S&P 500 Composite Index -13.5-11.5-4.4 1.6 FTSE World Japan -17.4-12.4-15.3-7.6 Nikkei 225-17.0-12.0-12.1-4.1 FTSE All World Asia Pac (ex Jp) -8.5-6.5-10.4-8.5 FTSE Australia -7.9-8.3-2.5-6.8 FTSE China (All Cap) -10.4-8.3-18.7-13.8 FTSE Hong Kong -6.0-3.9-10.1-4.6 FTSE Korea -11.9-10.4-17.3-15.7 FTSE Singapore -7.2-4.7-7.6-3.8 FTSE Thailand -9.3-7.8-4.8 1.2 MSCI Emerging Markets -7.4-5.2-9.7-8.9 MSCI Brazil 10.2 16.3 16.7 6.1 MSCI Argentina -1.3 1.0-50.7-47.7 MSCI Mexico -14.4-16.8-14.7-10.0 MSCI South Africa -2.1-1.4-11.5-19.1 Bond index total returns* FTSE Actuaries UK Conventional Gilts All Stocks Index 1.9 1.9 0.6 0.6 UK gilts under 5 years 0.6 0.6 0.3 0.3 UK gilts 5-15 years 2.5 2.5 1.3 1.3 UK gilts over 15 years 2.6 2.6 0.3 0.3 FTSE Actuaries UK Index-Linked Gilts All Stocks Index 1.9 1.9-0.3-0.3 iboxx Non-Gilts Index 0.1 0.1-1.5-1.5 Salomon World Govt Bond Index 1.8 4.2-0.8 5.3 10-yr benchmark bond returns* Yield as at 31.12.18 (%) UK 1.3 3.2 3.2 2.0 2.0 US 2.7 4.6 7.1-0.1 6.1 Japan 0.0 1.3 7.4 0.8 9.9 Germany 0.2 2.3 3.1 3.3 4.4 France 0.7 1.1 1.9 1.8 3.0 Currency changes vs sterling Exchange rate as at 31.12.18 Q-Q chg % Y-Y chg % Dollar 1.2736 2.4 6.2 Euro 1.1141 0.8 1.1 Yen 139.73 6.0 9.1 Interest rates Rates as at 31.12.18 (%) UK base rate 0.75 0.00 0.25 US Fed Funds rate 2.50 0.25 1.00 ECB base rate 0.00 0.00 0.00 Commodities Price level as at 31.12.18 Oil (Brent crude) US$ per barrel 53.1-35.8-34.3-20.2-15.3 Gold bullion US$/troy oz 1,281.3 7.5 10.1-1.7 4.4 Comm Research Bureau Index -3.4-1.1-7.1-1.3 * Returns include income Source: Thomson Reuters Datastream All data is sourced from M&G unless otherwise stated. Past performance is not a guide to future performance. 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. Currency exchange fluctuations will have an impact on the value of your investment. For definitions of the investment terminology used within this document please see the glossary at: www.mandg.co.uk/investor/help-centre/glossary

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