Investment Outlook - Q2 2019
After a relatively torrid final quarter to 2018, equity market returns were extremely strong for the first months of 2019, reversing many of the losses of Q4. In a nutshell, the strong rally was predominantly a mirror reflection of what occurred during Q4. Positive sentiment winning out, helped by:
A de-escalation of fears for a global trade war as a result of ongoing US-China trade tensions.
Central banks turning more dovish, particularly the US’s Federal Reserve which significantly changed its interest rates outlook. The European Central Bank also appeared set to remain very much in dovish mode.
An extension of the Brexit deadline, with a “no deal” exit not at all expected by markets
Within equity markets and across asset classes, riskier sectors and assets generally outperformed with very large US and Emerging Market tech stocks re-emerging as a winner for the quarter.
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At KBI Global Investors, our central view is that fundamentals remain supportive for further gains in global equity markets but expect absolute returns from here to be more modest. After the strong gains in the first few months of this year, it is reasonable to expect that markets will tread water in a narrow trading range in the near term to allow fundamentals to ‘catch up’. Economic growth has been slowing but importantly the major world economies are still growing and patient policymakers are again very market friendly in the absence of any significant inflationary fears!
At KBI Global Investors, our central view is that fundamentals remain supportive for further gains in global equity markets but expect absolute returns from here to be more modest. After the strong gains in the first few months of this year, it is reasonable to expect that markets will tread water in a narrow trading range in the near term to allow fundamentals to ‘catch up’. Economic growth has been slowing but importantly the major world economies are still growing and patient policymakers are again very market friendly in the absence of any significant inflationary fears!
We continue to believe that fears of a global recession are overblown at this point. Reassurance on fundamentals over coming months should continue to support higher global equity markets and pressure bond yields higher again. Returns available on cash and yields on fixed income are negligible and we note that global investor surveys show that investors are positioned very defensively with above-average cash holdings.
Markets are ‘desperately seeking reassurance’ on three fronts:
We continue to believe that fears of a global recession are overblown at this point.
Asset class outlook: Equities
The support from equities will be dependent on fundamentals more than sentiment from here, with sentiment having been the predominant driver of the flip-flop between Q4 and Q1.
Earnings growth will be most crucial driver from here, helped by a continuation of the global economic expansion, albeit at a slower pace.
Overall valuations are at fair value levels and in some cases cheap (e.g. Emerging Markets and Europe to a lesser extent). Across sectors we are concerned by the extent of the over-valuation of pockets such as elements of the technology sector.
It is also crucial that we see signs of a stabilisation of the European economy led by Germany and France, and we expect to see corporate leadership via increased M&A activity. Buybacks and higher dividends will also support stocks.
