Market trends and perspectives – April 2019Analysis | April 23 2019
Catherine Wajsman answers a series of questions aimed at understanding market trends in the past quarter.
What, in your opinion, caused markets to plunge in Q4 2018 and skyrocket in Q1 2019?
In our opinion, last year’s decline was triggered by fear caused by four combined factors:
- the fear of a long-term rate hike
- the fear of smaller margins for industrial companies due to a severe slump in the world automotive market
- a downturn in world trade.
- Furthermore, a nine-year, near constant rise had just been seen on American stock markets.
The increase in early 2019 was of course caused by a correction of the steep declines seen in 2018, and mostly a direct effect of the policy changes of central banks. The Fed does not foresee further rate hikes; to the contrary, President Trump is pushing for a cut. Inflation is under control. The ECB has ruled out any tightening of policy this year and is offering banks long-term re-financing.
These newly accommodating policies have quieted investors’ end-of-year fears, even if macro indicators call for caution perhaps.
What elements are likely to continue boosting markets?
In the U.S., still the model for western economies of course, a certain bounce back can be expected to continue. A wage increase is supporting the price index, and globally, economic figures are more reassuring.
We’re confused in Europe. Should politics take centre stage (Brexit, yellow jacket movement in France, the European elections, etc.)? Seasoned experts, including analysts from the management firm H2O, view Europe as the potential surprise of 2019: modest growth is often an amenable environment for stocks.
Most managers are somewhat concerned about financial markets, however. Some have written: “markets no longer know who to turn to, and the correction will happen, even if delayed.” Furthermore, managers must deal with investors’ profound lassitude concerning market volatility; such investors often prefer 2 to 8% yields, depending on their risk tolerance, rather than overly volatile investments.
In terms of Asia:
- a bounce back of the Chinese economy would support the European economy.
- Chinese stocks are increasingly included in international stock indexes.
- Chinese growth is key, given its impact on emerging economies.
- Chinese growth levies important influence on European and American exports.
- The ongoing loosening of the People’s Bank of China (PBOC) could help the economy pick itself up this year.
Remember, though, that private debt has reached record highs in China, and U.S. – Chinese trade talks could be surprising.
Where do you stand today on emerging markets?
Several factors are contributing to healthy emerging markets: more accommodating Fed policy, emerging currencies and a stabilised dollar, less restrictive central bank policies in emerging countries, and capital flowing back to source countries.
This being said, valuations on these markets are less attractive than they were a year ago, and careful attention should be paid to the results of emerging companies and the outcome of Chinese-American talks.
How do you feel about currencies?
Rate spreads between major currencies are shrinking. In terms of reserves and trade, Russia and China are diversifying beyond dollars. This is why we don’t believe conditions for a dollar hike are met – notwithstanding political risks.
The euro has taken a downward turn since September 2018 (-2% on the dollar since the beginning of the year). Deteriorated advanced indicators such as the PMI, and uncertainty surrounding Brexit, do not help matters of course.
It’s quite surprising: in Q1, bonds were also “the place to be”: 3.34 % for bonds in general; 6 % in local currencies on emerging debts.
The usual and exceptional blind spots drive us to prefer investments offering excellent security and returns equal to or above 5%, to take advantage of the attractive valuations enabled by low rates.
Our overall allocation strategy will always focus on a selection of quality securities – most often growth stocks – even if this means riding out market volatility, as was the case in Q4 2018 and Q1 2019.
The big question is whether projected figures for companies are overly optimistic and whether these will be adjusted downwards in the upcoming months.
Statistically speaking, in recent decades, years that started off on strong results rarely ended badly.