Market Outlook: Balanced But Still Biased To Upside

Impact of lower rates, China tax cuts and political progress likely to be evident by mid-2019

Weak incoming data, both in respect of profits forecasts and the global economy is in sharp contrast to the strong performance of risk assets such as equities and corporate credit during 2019. Conflicting narratives can certainly create angst but in this case, reflect investors’ belief that central banks have acknowledged the slowing global economy. We would concur that easier financial conditions means relief from negative economic surprises may be in sight by mid-year. Despite having risen sharply in the first few weeks of the year, on balance we believe global equities now have the prospect of volatile but still upward progress, as political events unfold.

In January, we outlined the reasons for shifting from a cautious to neutral position on global equities. Valuations had softened - and for the UK had even become cheap relative to history. We viewed central banks as highly likely in time to respond to the evident weakness in the incoming economic data. Furthermore, a fiscal response to slowing growth in China was likely to be forthcoming.

In terms of politics, re-election dynamics suggested US President Trump is under pressure to agree on a deal on US/China trade this year. Similarly, China is also incentivized to find a route out of the current trade conflict, given the slowing Chinese economy in recent quarters. Finally, the absence of support for a no-deal Brexit in the UK Parliament suggested a delay or a soft Brexit remained the most likely options. These factors comprised in our view 2019’s wall of worry - a wall which markets proverbially climb.

A month later, global equities have risen notably yet incoming economic and corporate data outside the US continues to be disappointing. Notably, corporate profits forecasts are still suffering from downgrades of a magnitude not seen since 2015. While we anticipate a stabilization during Q219 the naked truth is at present there is no sign of a turn in this trend. In particular, the downgrades to emerging market equities which started in Q2 2018 have if anything accelerated during Q418.

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Disclaimer: Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing ...

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