Q4 Gloom Quickly Forgotten
Strong corporate earnings, a change in tone from the US Federal Reserve and the end of the longest US Government shutdown in history sparked a reversal in investor sentiment in January, triggering a sharp rally in markets across the world. In fact, global stocks (as measured by the MSCI World index) recorded their best January on record and the strongest of any month for more than seven years. The oil price also recorded its best January gain on record after a turbulent 2018. The Federal Reserve’s increasingly dovish stance eased concerns over tightening financial conditions. Moreover, other geopolitical factors weighing on markets, such as the risk of a no-deal Brexit and a breakdown in US-China trade negotiations, were perceived to be edging towards ‘market friendly’ outcomes. Global equities made further progress in February, albeit at a steadier pace than January. End of January/early February saw an end to the government shutdown in the US. There was optimism around US-China trade talks and further dovish comments from Federal Reserve Chair Jerome Powell, stating that rate hikes would be gradual and data-dependent. The Q4 earnings in the US were solid with earnings-per-share growth of approximately 13%. Reports of Chinese stimulus measures lifted sentiment further, to the benefit of other emerging markets. There were some signs of weakening momentum in the global economy however. Germany narrowly avoided a technical recession, with no growth recorded in Q4.
Chinese Markets Playing Catch-Up
The continuing drag from the US-China trade dispute forced the People’s Bank of China into action in Q1, reducing reserve requirements for banks and following this up with further liquidity injections into the banking system. Market sentiment quickly rebounded with the Chinese markets on a tear in February and March. At time of writing, the Shanghai Composite is up 24% on the year and the Shenzhen, which generally contains smaller and more tech-focused companies, is up around 32%. Whilst the stimulus measures were substantial, they stop short of the all-out support seen in previous stimulus efforts.
The Powell Put? The Powell Pivot? The Powell Pause?
The ‘Powell Put’ is a reference to what was known as the ‘Greenspan Put’, whereby markets believed that long-time Fed Chairman Alan Greenspan would ride to the rescue of markets during a sustained sell-off in markets. In Powell’s case, markets were alarmed in October when he suggested, “we’re a long way from neutral” on the Federal Funds rate and that the central bank’s balance sheet reduction programme was on “autopilot”. Since then, markets have latched onto a perceived backtrack in his earlier hawkishness, reassured by his insistence that the Fed would be “patient” about future tightening and adopt a wait-and-see approach, especially with inflation seemingly benign at present. This, amongst other things, has been enough for markets to recoup the significant losses suffered in late 2018.
At the time, the fourth quarter sell-off felt like an overreaction and we backed this by increasing our equity allocation. Markets have subsequently recovered this lost ground and we are on the verge of taking profits on these positions. First quarter earnings in the US will be watched closely for signs of weakening earnings growth after fourth quarter figures exhibited signs of a slowdown. The overall tone of management guidance during the last earnings season appeared to be on the negative side, especially for internationally exposed companies. On
a more positive note, the bar has been set low for companies to attempt to exceed expectations. For sterling-based portfolios, the fog of Brexit remains. Whilst this uncertainty persists, it is increasingly difficult to make informed investment decisions in the very near-term at least. A number of clients have asked if we have been implementing any specific changes within the portfolios pertaining to Brexit. Whilst the portfolios have been assessed from an overall risk perspective, it would not be prudent to make decisions based on outcomes we cannot predict with any certainty. For example, by moving away from Sterling (to protect the portfolio from a detrimental outcome), this would create significant currency risk within the portfolios, which is likely to hurt portfolio performance should a favourable outcome occur as far as the markets are concerned. The portfolios naturally have exposure to nonsterling assets and the UK equity exposure within the portfolios is predominantly large cap names that derive a large portion of their revenues in other currencies.
Disclaimer: The views thoughts and opinions expressed within this article are those of the author and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.