Market Commentary - February 2019
12th February 2019
December 2018 saw the MSCI World Index decline 7.55% in sterling terms, wiping out any gain for the year. Quantitative Easing (QE) had been the story of the current bull run, but there were four rate rises in the US in 2018 (following 3 rate rises the year before), and the story changed to one of Quantitative Tightening (QT). As rates rose, markets re-priced assets accordingly and the only asset class that gave any comfort, during the fourth quarter in particular, was cash. Company earnings revisions, which indicate how investors expect companies to perform going forward, have been revised down following record highs induced by Trump’s tax reform.
Fast forward to the end of January and markets had regained most of December’s fall following the Federal Reserve’s (Fed) about-turn on the trajectory of rate rises. The change in rhetoric on the Fed’s view of where they see the neutral rate is a material change and one that is reviving equity prices. The middle ground between QE and QT seems to have calmed investor sentiment.
Taking a step back from the volatility seen over the past four months, we believe the support for allocating investor capital to equity markets remains. The yield curve has not inverted (indicating that a recession is not around the corner), the labour market in the US is still strong, market data shows that many industries are still in growth mode and there even seems to be a willingness from Donald Trump and President Xi Jinping to strike some sort of truce over trade. It is undeniable that the rate of growth in the US will slow, but forecasts are that it will still grow at around 2% (rather than the 3-4% witnessed in 2018), perhaps giving chance to other economies around the globe to catch up. This may be aided by a weaker dollar, as interest rates in the US are no longer expected to rise, or at least not for the foreseeable future.
We know that Brexit has an uncertain outcome and we know that the trade war is still ongoing. We also know that the current bull market is closer to its end than its beginning. However, we also know that equity valuations have fallen, company fundamentals are supportive and earnings have been revised down, which implies that the slowing global growth we are seeing is priced in to markets. Bearing all this in mind, we believe equities still represent the best asset class for client portfolios, and although we have reduced our cash levels, we retain a relatively high position until the economic outlook becomes clearer.