Market Commentary - May 2019
21st June 2019
Current market conditions offer plenty of arguments for bulls and bears.
The bulls can make the case that we are beginning to see fewer negative earnings revisions. America’s Federal Reserve has pivoted on its rate-rising agenda and the market is now actually pricing-in rate cuts rather than hikes. This is surely good for equities. The S&P 500 Index took just 215 days to surpass its previous high following a 20% drop at the end of last year. It once took 25 years to achieve the same feat. In the meantime, as the head of Blackrock said lately, there is still too much global pessimism and institutions and retail investors alike are underinvested in risk assets. Better that perhaps than euphoria driving markets into overheated territory. It leaves some scope for investors to jump back in and lead to what has been unappealingly described as a “melt-up”.
But then there is the case presented by the bears. They could argue that the global recovery driven by US markets has been supported more by company buy-backs than stirring investor confidence. Q1 buybacks are up 12.1% year on year, affecting one in three US companies and boosting earnings per share growth by 4%. This cannot be sustained long-term and is a temporary fillip. The bears might also add that institutional money continues to shift from equities to bonds.
This leaves markets delicately balanced and leads us to conclude that our current position – very narrowly underweight to neutral equities – is appropriate in the circumstances.
Though markets had a good start to the year, we are probably back to a lower growth and lower return environment. In such circumstances we expect quality stocks to outperform cyclicals. That bodes well for our fund selection, which is weighted towards investment styles focusing on strong businesses with healthy profit margins and competitive advantages.
We feel equity markets still have life in them, but on the basis that the time to fix the roof is when the sun shines, we have been reviewing the alternatives element of portfolios. Our view is that alternatives should be consistent with the aims of our clients, who are seeking returns. Whilst that means they involve investment risk, they should have low correlation to equities and offer long-term diversification benefits. They should also be liquid. One of the problems of many absolute return funds is that they often deliver absolutely no returns. Worse, they still lose money when markets fall.
The saying goes that bull markets don’t die of old age – which has many investors searching for the next fatal threat. We feel equity markets still have life in them, and the Federal Reserve has just given them a stimulating shot. On trade war rhetoric, we would not be surprised if the brinkmanship between China and President Trump continued, at least while the latter needs a boost in popularity as next year’s Presidential election looms. As ever, we will continue to keep our finger on the pulse and prepare to act immediately should the environment change.
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