Investor Insight - Spring 2019

  • Quarterly investor insight
  • 10 minute read

By Nancy Curtin

Rainy days, sunny skies

There is a strange dichotomy happening in 2019. On the one hand, economic data across the globe has been weak and, in some cases, such as in Europe, indicates a sharp economic deceleration. Headlines have been filled with the ongoing saga of Brexit and its impact on the UK economy, ongoing trade tensions, and slower global growth, while the US yield curve has recently inverted (long-term bond yields have fallen below those at the short end) which historically has been a sign of an impending recession. However, financial markets tell quite a different story. Indeed, for GBP investors, the global equity index has risen about 10% in the first quarter. While stocks did correct sharply in the last quarter of 2018, rebounds of this magnitude signal that markets are more positive than the headlines. Is it a rainy day or are there sunny skies?

We remain in the sunny skies camp for now, believing that growth and corporate earnings are likely to be better in the second half of 2019. Our base case remains that it will be a positive year for returns, which we expect to be in line with long-term averages, while we continue to see opportunities to add incrementally to returns through our global research and security selection. We base this assumption on the following factors:

  • As we examine the detail of the economic data, we find it is not as bad as it might first appear.
  • Much of the ‘negative policy’ actions which helped contribute to the economic slowdown are in the process of being reversed, which should have a positive impact on growth and earnings.
  • The Brexit outcome remains uncertain, which continues to cloud the outlook for UK growth. We remain cautious, but believe the tail risk of a hard Brexit has reduced.
  • Inflation is benign and is not signalling any need for Central Banks to remove the proverbial ‘punch bowl’ and tighten monetary policy.
  • US Presidential elections (November 2020) and the 70th Anniversary of the founding of the Communist Party in China (October 2019) are important milestones for the two largest economies in the world and policy makers are likely to maintain an accommodative stance.

However, risks remain. We recognise that we are in the advanced stages of this economic cycle and think volatility will remain a feature of markets. Investors should not expect a smooth ride. Rising debt levels and excesses in certain credit markets remain additional risks lurking below the surface. Given current levels of inflation and interest rates, these are unlikely to be a problem for now, but this can change quickly and we continue to monitor them.

As multi asset class investors, we temper our constructive ‘sunny’ outlook for shares with a conservative positioning in bonds and an allocation to alternatives assets, which can provide some ballast and diversification as and when rainy days emerge.

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