The share price recovery that began at the beginning of this year continued into the second quarter of 2019 despite heightened geopolitical tensions, aggravated by Donald Trump’s tweet about increasing tariffs on Chinese imports from 10% to 25%.
If you held firm with equity exposure, you would be back to the pre-scare levels that started during the autumnal months of 2018, as the second quarter proved an extraordinary one for global equities. A closer look highlights the volatility experienced during this most recent quarter. The S&P 500 rallied sharply in June, up almost 7% and subsequently recovering the losses suffered in May. This coupled with the positive start for April meant that the 2nd quarter’s performance for the S&P 500 was up circa 4%. Furthermore, once the strong 1st quarter performance is factored in, the S&P 500 has witnessed a 17% return for the first half of 2019 which represents the best start to the year since 1987. The FTSE 100 rallied 2% during the second quarter, Eurostoxx 50 was up 3.6% whilst the Japanese Topix index was flat over the quarter, marginally down in Yen terms as the currency strengthened.
Gold was a star performer during the month of June, up almost 8% and hitting a price level not seen since 2013, representing a six-year high. This was against a backdrop of geopolitical tensions and potential rate cuts, which is also reflected through the fall of US Treasury yields and which continued their fall with 10-year yields briefly trading below 2% for the first time since 2016.
All in all, investors continue to enjoy a profitable year to date, so far.
That said, the question on many investors’ lips is whether the current environment remains conducive to equities, particularly as many commentators are predicting weaker economic conditions. Global economies are predicted to slow, including UK, USA as well as parts of Europe and Asia whilst the Fed Chairman Jerome Powell and his European counterpart, ECB President Mario Draghi, have both indicated that a rate cut could be on the cards. In fact, it looks very likely that the Fed could conceivably begin interest cuts within the next 3 months.
Whilst we do not disagree on a prospective outlook of slowing global growth, our view is that a slowing economy does not necessarily mean negative potential returns. In fact, rate cuts are often thought of as a catalyst for growth and therefore may prove to be positive for equities.
The reason is actually very simple: global economies are slowing but not dramatically so. Coupled with a low interest rate environment, and solvent corporates, equities actually benefit from both a valuations perspective and also from expectations that corporate earnings should pick up in what is otherwise a stable economic environment.
Closer to home, in the UK, we have an additional distraction (or two). The Conservative leadership field has been narrowed to two candidates – Boris Johnson, the overriding favourite and Jeremy Hunt, the current Secretary of State for Foreign and Commonwealth Affairs. All eyes are firmly on Boris Johnson especially as he has pledged to take the UK out of the EU, with or without a deal. We continue to monitor both UK politics and economic commentary very closely.
A quick word on the US economic expansion, which officially has now surpassed the previous record of 120 months of economic growth (having last occurred between March 1991 and March 2001, according to the National Bureau of Economic Research). The US economic expansion since the Financial Crisis has been slow but resilient and will likely remain resilient. We most definitely do not see it running out of steam any time soon. Traditional catalysts such as overheating and/or the need for deleveraging provide for limited consideration. Concerns about slowing growth and any negative impacts from trade tensions will be met with a further bout of easing. The Fed has indicated that it will look to counter any downside risks.
The ECB is also likely to provide additional stimulus whether by forward guidance or restarting quantitative easing, and Japan is also considering further stimulus as the Bank of Japan continues its battle to deliver target inflation alongside a weaker Yen.
In conclusion, we expect to witness slower economic growth but recommend that portfolios remain invested in global equity markets, as per their strategic asset allocation, particularly considering the prospective outlook for corporate earnings.
And now for a few words on the highly topical inverted yield curve (representative of short term interest rates being higher than long term interest rates), which has apparently predicted every US recession over the last 50 years.
We are closely monitoring this leading indicator, specifically its inversion and whether it will continue. But, bonds markets are not always right, and we believe that adopting a cautious stance to investing, at this stage, could see one missing out on further equity market returns. In fact, we believe it is too early to be selling equities. Furthermore, and as mentioned above, Fed monetary policy remains accommodative, and fundamentals are generally healthier than prior to previous recessions. This indicator may ultimately prove accurate once again but, with the Fed armed to ease, and Europe and China also willing and able to stimulate, we do not believe the next recession will arrive any time soon.
The holiday season is almost upon us and there is plenty of uncertainty around. During such quieter periods, any proverbial curve ball news item (or tweet !!) could spark a short-term reaction to markets, so more equity market swings cannot be ruled out. No harm in preparing for the unexpected, but our view remains that the yield curve reads buy equities, not sell.
This article has been prepared for information only. Any opinions or views expressed are for information purposes only. The views expressed herein are generally those of Swiss Global which sets the long term asset allocation models, along with both the strategic and tactical allocation. Any material is provided for informational purposes only. It is important to note that the value of any investment and the income derived from it can go down as well as up. It may be affected by exchange rate variations and you may not get back the amount invested. Past performance is not necessarily a guide to future performance and individual taxation circumstances may vary. You should consult your tax adviser if in doubt. Any information provided does not constitute a recommendation and you should consult your adviser, consultant or financial representative for advice concerning your specific circumstances. Any opinions expressed should not be relied upon and are subject to change without notice. This material is for the sole use of the intended recipient and is for distribution only under such circumstances as may be permitted by applicable law.Return to Insights