Global Markets to 22 October 2018
- Global equity markets continue to struggle against a backdrop of negative sentiment.
- While the US economic outlook remains strong, China’s economic backdrop looks rather challenging as more and more trade tariffs are imposed.
- However, the latest batch of US and Chinese corporate earnings figures looks encouraging.
- Bond market strategists continue to focus on US Treasury yields and Italian sovereign debt.
- Crude oil prices remained relatively stable at US$80 a barrel, even though it was reported that US crude inventories rose for a fourth successive week.
- From a long-term perspective, we remain positive regarding global equities, but the markets have become much more volatile and are suffering from short-term nervousness.
Global Market Summary
Global equity markets have struggled to maintain any positive momentum as recent surges in Treasury bond yields and rising trade tensions have taken their toll. Even the current corporate earnings season has been unable to inject any real positivity into the markets, given their concern that the trade tariffs have yet to affect future corporate profitability.
Similarly, the strengthening US dollar and the expected continuation of the Fed’s monetary tightening policy is affecting optimism about future global economic expansion: many analysts are now downgrading their numbers for 2019.
All of this makes for a significantly more challenging time for markets and investors. But it also heralds a number of exciting investment opportunities as the investment cycle shifts from a decade of low interest rates and loose monetary tightening to higher interest rates and bond yields.
Global investors around the world had high expectations for this year and were optimistic about returns on the stock markets. But then things began to change from an economic perspective. While the US stock market has continued to rise, the rest of the world’s major markets have suffered and have so far fallen dramatically.
This change in sentiment has mostly been driven by fear regarding trade tariffs, higher interest rates, a strengthening US dollar and Brexit, recently resulting in investors selling down some of their exposure to risk assets and adopting a more defensive stance. Even the more resilient US stock market has cracked under selling pressure, creating a number of difficult trading sessions in recent weeks.
In fact, the S&P 500 Index is having its worst month in nearly three years. As one would expect, this has led to some market analysts predicting further forthcoming weaknesses. This does indeed seem likely – this current US economic recovery is close to the longest in the country’s history, with valuations perceived to be relatively high across the stock market.
This is no surprise, given rising US bond yields and disagreements between the White House and the Federal Reserve Bank over its monetary tightening policy. Furthermore, China and the world’s emerging markets have been hit badly by a stronger US dollar and escalating trade tariffs. It is therefore quite understandable that investors should feel nervous and uncertain about global equity markets.
These headwinds are likely to make themselves felt even more over the coming weeks, rendering the markets unpredictable and at times highly volatile on a day-to-day basis. This may result in additional weaknesses, pushing valuations down to more realistic levels, particularly regarding the S&P 500 Index.
There will therefore likely be further temporary rotation out of the higher-growth sectors – including technology and consumer discretionary – in favour of the more defensive sectors, such as utilities and consumer staples. That said, given the longer-term technological innovations that are disrupting all global sectors, businesses and the way in which people live their lives, there should be a reversal back into some of those quality tech names over time – since they are the leading innovators.
After such a long period of outperformance from growth stocks, some market analysts are now forecasting a change in investor sentiment. But the value-over-growth conundrum is only likely to be determined by how technology stocks fare, and by how much the US 10-year Treasury bond yield rises. The technology revolution will doubtless be with us for decades, whereas US bond yields are likely to be nearing the peak of their current cycle.
And so we continue to focus on fundamentals such as corporate profitability, which over time, tends to drive share prices and stock markets. This next week will be significant as far as US tech companies are concerned: they will start reporting earnings; and on the bond markets, traders are likely to focus more on Italian bond yields, in view of their volatility last week. Political concerns combined with growing fears that international bond investors might disengage from one of the largest bond markets in the world have created some disquiet.
Finally, on the commodity markets, the price of oil remained stable at US$80 a barrel, even though it was reported that US crude inventories rose for the fourth successive week.
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 capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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