Global Markets to 01 April 2019
- Global equities register solid first-quarter gains as central bankers ease monetary conditions and the two superpowers come closer to a trade deal.
- Wall Street benefits from positive sentiment and sees its best year start since 1998.
- Government bond yields decline on recession fears, creating both inverted and negative yield curves.
- In the UK, Brexit rumbles on and the Prime Minister is faced with having to seek a further extension period.
- In commodities, the price of crude oil sees its best quarter in almost a decade.
- The trend was your friend in the first quarter of 2019, with the MSCI World index up by just under 12%.
Global Market Summary
The first quarter of 2019 has seen the global equity markets rally aggressively. This typically happens when the central banks ease monetary conditions and suggest that interest rates might remain lower for longer. It is also attributable to the news that the US-China trade talks were looking more positive and are likely to end with some form of agreement.
Both have played key roles at a time when weakening activity across the US, China and Europe are all negatively impacting global growth and economic data. It now seems fairly obvious that the markets’ irrational behaviour in December was motivated by tax selling, algorithms and global investors becoming increasingly concerned over financial headlines. The result has been a very strong global V-shaped recovery in risk assets [global equities], as euphoria returned to the stock markets.
Growth is a panacea and it would seem that Washington’s intention is to continue trade talks with Beijing with a view to securing a positive outcome that will benefit both superpowers and so global trade. According to US officials, China has made proposals concerning a range of issues – more than ever before –, including the sensitive issue of forced technology transfers.
The major global indices have registered some impressive gains over the first 12 weeks of 2019. Wall Street’s Dow Jones Industrial Index gained 11.2% – its best start to a year since 2013; the NASDAQ Composite Index recorded a quarterly gain of 16.5% (its biggest since 2012); and the S&P 500 Index surged 13.1% – its best quarterly performance since 1998.
In the UK, while all the media focus has been on Brexit, the financial markets have seen the FTSE 100 and All-Share indices rise by just over 8%, while the FTSE 250 Index has beaten its larger brother with a rise of 9.5%. However, the highest recorded quarterly gain was in China: the Shanghai Composite Index rose by just under 24% following an announcement from the MSCI Index providers that their indices would be re-weighted throughout the year to incorporate more Chinese companies. The weightings will increase from 5% to 20% in three steps, ending in November.
As China’s representation in global benchmarks grows, having little or no exposure to the market will increasingly become an active decision for global investors.
Still, in China, global bond indices have opened the door to the Chinese bond market, which is the third largest in the world [US$12 trillion]. This is another important change that is bound to have significant implications for both the global bond and equity markets over the coming years.
The recent inversion of US Treasury bond yields and Germany’s 10-year Government bund yield falling below zero are seen as evidence by some traders that we may be heading for recession. However, if US inflation remains benign for the rest of the year, the Federal Reserve Bank dovish and growth rates respectable, then the likelihood of recession will decrease. That said, market watchers will continue to bear the old New York model in mind about inverted yield curves and recession fears.
In the UK, the government has continued with its attempts to find a version of Brexit that is acceptable to Parliament so the country can leave the European Union. Once again, however, this has proved impossible, and the March 29 deadline came and went. The Prime Minister now has until April 12 to seek a longer extension to Article 50 if the UK is to leave with a deal.
Brexit is now running on fumes: deadlines come and go and extensions expire as Theresa May and her government continue to fail to secure the majority they need for an orderly exit from the European Union. She will have a fourth attempt at getting her deal through this week, warning that there would be “grave” implications if it is rejected again and adding that she fears “we are reaching the limits of the process in this House”.
Away from equities, bonds and politics, crude oil has recorded its best three-month period in almost a decade and is up by more than a quarter. This was despite doubts over OPEC and coalition production cuts and the loss of barrels of oil due to US sanctions on Iran and Venezuela. Most analysts, however, do not see oil prices exceeding US$75 a barrel or coming anywhere close to those highs of US$86 that we saw in October.
Longer-term questions still remain over future demand for crude oil – especially with the plethora of initiatives to promote the use of liquefied natural gas, clean energies and biofuels, and progress in power storage technologies. Although these alternative intermittent energy sources will eventually become part of everyday life, this is still some way off. Crude oil and petrol will, therefore, continue to constitute our principal energy sources.
“The trend is your friend” maxim manifestly held true over the first quarter of 2019 and investors who embraced risk have been personally rewarded. Indeed, the MSCI World Index rallied by just under 12%. But as we enter the second quarter of the year, stock markets will face some headwinds, a convergence in GDP growth in the developed world and an additional narrowing of global earnings growth. They will also have to deal with fears that central bank policy could be wrong, or there could be a further contraction in global economic growth, eventually leading to recession.
Valuations, however, still look attractive – at least from a price-to-earnings perspective. Similarly, equities still appear to be better value than bonds, which can only be justified in terms of their safe-haven status in periods of risk aversion. On the domestic front, the challenge for UK investors continues to revolve around the possible outcomes of Brexit – with their varying impacts on UK business – and of course the direction that sterling will take following a conclusion.
Since the beginning of the year, investment risk has switched from anxieties over central bank monetary policy and trade tensions… to politics and growth. Over the next few weeks, investors are likely to turn their attention to first-quarter corporate earnings growth, which could result in a more volatile period for global equity markets.
Nevertheless, any meaningful weakness in the markets should be viewed as a buying opportunity, particularly in relation to those high-quality businesses that will continue to deliver elevated corporate profitability and rising dividends while embracing change against the global economic backdrop.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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