Market Overview & Outlook – Quarter 1 2019

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Global markets have made the best start to a year in almost three decades with a strong recovery after the volatility and downdraft in the winter of 2018. Investors’ views on equities changed from pessimistic to fairly optimistic over the past quarter on positive news coming from the US regarding central bank policy and the US-China trade war.

The market rally has been principally driven by the unexpected decision by the US Federal Reserve (the central bank of the USA) not to increase interest rates with a ‘patient’ approach; indeed, there is even talk of a potential rate cut later in the year. The change in the trajectory of the interest rate policy was made in an attempt to prevent deterioration in the pace of economic growth. The positive news had a particularly strong effect on the performance of US equities in January which subsided to a more stable pace in March. In addition, the Fed has confirmed its plans to draw a halt to withdrawing quantitative easing (QE). Both the European and Chinese Central Banks have introduced fresh stimulus packages in recent weeks, in Europe’s case to address ‘continued weakness and pervasive uncertainty.’

Such a supportive stance by central banks of maintaining low interest rates and increasing money supply is extending the bull market from 2009 to one of the longest on record.

Whilst the US-China trade dispute remains unresolved, talk of progress has given markets a boost, especially as President Trump postponed a further increase in tariffs. Aside from easing trade tensions, Chinese stocks were further buoyed by index provider MSCI’s move to increase the weighting of China-listed shares in its benchmark indices. Gains were also fueled by anticipation that Chinese authorities would continue to introduce supportive policies to counter the economic slowdown. The Chinese economy appears to have avoided a hard landing and should stabilise this year.

Corporate earnings, particularly in the US, have generally exceeded expectations and sectors hit hard in 2018 recovered significant ground. The technology sector performed particularly well, having struggled in the last quarter of 2018. Healthcare stocks returned more moderate gains whilst the rate rise projections hindered the performance of financial stocks which benefit from interest rate rises. The resolution of the US government partial shutdown was also a relief for markets.

UK and EU stocks also benefited from the overall feel-good factor. UK equities performed well in line with global stocks unhindered by the ongoing Brexit uncertainty while Eurozone stocks returned strong gains on news of central banks stepping away from tighter monetary policy. However growth worries continue to linger.

The Organisation for Economic Co-operation and Development (OECD) has reduced its global growth forecasts in light of a slowing global economy and political risks, but the forecasts nevertheless remain positive and broadly in-line with long-term trends. Historically, the year prior to a US Presidential election has been good for markets, especially when combined with political gridlock.

With the backdrop of continued support from central banks and President Trump eager to seek re-election in November 2020, our expectation is that the bull market could potentially extend for another 18 months.

However, the storm clouds are gathering, and we are alert to the risks. Prolonged low interest rates and de-regulation is storing up future problems, notably government borrowing in many countries and US corporate debt stand at a record high. Moreover, the bond markets are warning of trouble to come as yields on some short-dated bonds are higher than long-dated bonds. With geo-political events, such as Brexit and Trump’s nationalistic ‘America First’ policy, volatility has to be expected.

Our approach aims to capture the equity market upside and attractive dividend yield with a focus on defensive quality stocks with robust business models, earnings, profitability and strong balance sheets. In addition, we recognise that quality bonds have an increasingly important role in promoting diversification and enhancing returns over time.

 

Please note, our Market Overview & Outlook is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch.

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