In a welcome development for global equity investors, the pace of 2019 earnings downgrades has eased markedly during the first three weeks of February. Furthermore, while 2019 consensus corporate profits growth has fallen from initial expectations of around 9-11% in developed markets to 6-8%, and from 12% in emerging markets to 10%, a profits recession now appears less likely. It is still in our view a little early to have conviction this is the start of a sustainable trend. However, if it proves to be the case that earnings forecasts have stabilized it will be supportive of the rally in global equities.

Markets are rapidly ticking off some of the near-term worries which came to the foreground in the latter part of 2018. These were seemingly ever-tightening US monetary policy, growth risk in Europe and emerging markets and political developments in respect US/China trade and Brexit.

Exhibit 1: Is the worst of the 2018/19 downgrade cycle behind us?

However, halfway through Q119, we can now see a pronounced change in the direction of global monetary policy compared to December with the US Fed and Bank of England on pause and the ECB likely to ease its forward guidance in early March. Furthermore, a stabilization of 2019 earnings forecasts would at this point validate the recovery in markets.

Exhibit 2: 2019 consensus earnings growth forecasts have fallen – but remain positive

To build on this market recovery we believe investors will now need to see real progress in terms of international politics. US/China trade negotiations continue and the path to a Brexit deal remains unclear. Yet we continue to view the Trump administration as incentivized to bring US/China trade negotiations to a political conclusion this year and for Brexit, a no-deal Brexit remains without a majority in the UK Parliament and therefore unlikely.

Looking ahead, on balance we continue to expect progress in equity markets, but it is likely to be more hesitant and contingent on difficult to predict political developments, as the more straightforward value opportunities on offer earlier in the year have now been exploited.