Investment Outlook - Q4 2019
We enter the final quarter of 2019 with global equity markets remaining resilient to geopolitical events and genuine concerns of global economic and earnings slowdown.
The continued easing actions of global central banks have acted as a positive counterbalance for markets once again with the recent rate cuts by the US Federal Reserve, the ECB and many other central banks helping globally. For much of 2019 we have highlighted that markets would be ‘desperately seeking reassurance’ on three fronts, namely – Geopolitics; Macro outlook and earnings outlook. Six months on this remains THE core issue that investors are grappling with.
We have over recent months seen evidence of growth slowing across major economies but continue to believe that fears of a global recession are overblown at this point. Indeed much of the recent slowing is more related to sentiment surveys such as confidence rather than hard economic data. The blame for this softening is increasingly placed on the US-China trade spat and Brexit to a lesser extent. There is increasingly an inability for business or consumers to plan in such an environment.
We have been of the view all year that there won’t be a full-scale escalation of the trade spat, but rather a kicking of the can down the road. As the clock ticks by and the US 2020 Presidential election comes into focus, the stakes rise as the risk of a genuine recession increases due to this prolonged uncertainty! For the Republican President, the question of a truce versus causing a recession is looming large we believe!! This binary event is THE largest issue over coming months to drive markets in either direction. Logic suggests that bad news on the US economy may well increase the odds of agreeing a trade deal. This should help sentiment and markets as they anticipate a better earnings growth outlook for 2020.
While our core expectation remains that an eventual lessening of geo-political uncertainty and a gradually reassuring outlook will support further market gains into 2020, we continue to monitor these various downside risks of slowing growth and earnings prospects, trade tensions and geopolitics.
Asset class outlook:
While central banks continue to inject abundant liquidity and support market confidence, we continue to focus on fundamentals and commentary from company updates. We do believe that central bank actions will be less meaningful for markets and fundamentals now will matter more than central bank sentiment.
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. 2019 will be a ‘lost year’ for earnings with little or no growth now expected.
We view overall valuations are at fair value levels and in some cases cheap. Could Emerging Markets be a better place for 2020? Across sectors we remain concerned by the extent of the over-valuation of pockets such as elements of the technology sector. We do note that albeit early days we have seen a challenge to the sustained outperformance of growth and momentum stocks and the month of September was a stark reminder of how quickly such bubbles can implode and destroy capital.
Government bonds are fundamentally increasingly overvalued at low and unprecedented negative yield levels, with as we write Greek 10-year sovereign bond yields joining the world of negative yields.It is not normal for investors to pay governments for the pleasure of holding their bonds as is the current reality!
Indeed, sometime in the future we may reflect and ask ‘what were we thinking’ as occurs with all bubbles in hindsight! Governments at current bond yields have the most expensive currency ever and are being paid to spend it on their economies by investors.
Any hint of a move towards such fiscal spend would undoubtedly challenge bond yields very quickly. 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.
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.