Investment Outlook - Q3 2019
After an extremely strong first quarter, the second quarter also finished in positive territory thus confirming a strong first half of the year for global markets. In our second quarter outlook we highlighted that markets would be ‘desperately seeking reassurance’ on three fronts, namely –Geopolitics; Macro outlook and earnings outlook from companies.
In reality, 3 months on, sentiment remained volatile and markets remain uncertain on all three fronts. However, what has changed to support markets and THE change since April is that the ‘markets friend’, namely central banks have returned to center stage and the dramatic reversal in monetary expectations around the globe has again proven supportive. This is most evident in the US, where expectations of continued rate hikes at the beginning of the year have given way to expectations of rate cuts beginning in July. In addition, the belief that interest rates globally are now tethered close to historic lows for a prolonged period has also hardened into a ‘lower for longer’ mindset.
We continue to believe that fears of a global recession are overblown at this point, not least making bond markets especially vulnerable from current historic low levels of yield. It is reasonable to argue that we are currently experiencing a pause in economic growth globally but from our perspective its a pause that refreshes. We expect some mild reacceleration of economic activity globally through the second half of 2019 and into next year.
Our central view is that historically low (and negative) cash and bond yields and further reassurance on fundamentals over coming months can further support global equity markets and pressure bond yields higher but we expect absolute returns from here to be more modest. After the strong gains in the first half of the 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’.
Markets will continue to ‘desperately seek reassurance’ but have a back-stop support from the actions of global central banks. THE key risk remains the future path of China-US trade relations which is currently priced for a fudge/benign outcome.
While our core expectation remains that a gradually reassuring outlook will support further market gains, we continue to monitor the various downside risks. From trade tensions to Brexit related wobbles to potential currency wars these may well inject renewed volatility over coming months.
Asset class outlook: Equities
While central banks continue to inject abundant liquidity and support market confidence at all time highs, we continue to focus on fundamentals which is what ultimately matters. If anything, there is more downside than upside from here from central bank expectations. Therefore the support from equities will be dependent on fundamentals more than sentiment from here,.
Earnings growth expectations have been reduced for 2019, so its important that we also see this bottom out and a more positive expectation emerge into 2020
We continue to argue that 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.
Asset class outlook: Bonds
Government bonds are fundamentally overvalued at historically low yield levels. An unexpected deep recession would certainly support government bonds and at current yield levels they are priced more for a no-growth/no-inflation scenario than for a growth or inflationary one, hence extremely vulnerable.
Conclusion: We expect gains from here to be more modest and in a world short of growth, we do emphasise the importance of income and quality in our stock picking. Given the major change in expectations, Central banks may disappoint from here, highlighting the importance of good old fashioned fundamentals!
KBI Global Investors Ltd. is regulated by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority in the UK. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. KBI Global Investors (North America) Ltd is a registered investment adviser with the SEC and regulated by the Central Bank of Ireland The views expressed in this document are expressions of opinion only and should not be construed as investment advice.