Market Musings: Up we go again but for how long?

When investing it is important  to not only be aware of what is happening in your own local market but also the myriad of markets around the world that interact and influence it. One must understand the trends and implications both locally and globally. Global markets continued their upward trajectory and held momentum through March. The most newsworthy stories have been that the May government narrowly avoided the cliff edge with a deadline extension for Brexit negotiations and economic data out of China showing some surprises to the upside. The Chinese government continues to incrementally deliver stimulus to the economy and credit conditions continue to ease up, which we would suggest is the biggest leading indicator of aggregate demand in the short run. This bodes particularly well for the broader emerging markets in the Asia Pacific and Australia where elections will continue to dominate the headlines until the end of May. ​

We continue to believe that Asia presents significant opportunities as policymakers put in place fiscal spending programs and monetary policy conducive to consumption in the medium term. 
 
United States
 
The optimism continued for a third month this year with all three major US indices being in the green. While the Nasdaq composite led the way with 2.70%, the S&P 500 and Dow Jones contributed a meaningful 1.94% and 0.17% (the Dow was held back by Boeing) respectively. On a quarterly basis, this has been an exceptional start to the year representing a 16.81% return for the Nasdaq and 13.65% for the S&P 500. Despite the apparent euphoria, we would remain cautious especially given the slow down in earnings growth, and approximately eleven different sectors showing declines in estimates over the quarter. 

This is not to say that we are predicting that the markets will turn south tomorrow, after all over the short term, weakening fundamentals do not necessarily mean that markets will suffer losses. Rather there will be a reversion back to the mean. Cash Flows will matter (eventually) and, in perhaps a telling sign, Disney’s announcement of moving into streaming was met with an exceptional response by the market. This suggests that investors are now looking to reward companies that reinvest in the business as opposed to share buybacks, it might pay to perhaps be a little more discerning going forward?

Another concern is that economic growth has continued to slow across the US with only 20,000 new jobs added in February and consumer confidence trending lower. Retail sales also fell through February and March albeit slightly, with the flipside being that there seems to be growth in business sentiment and spending.

Europe & United Kingdom

The soap opera continues in Europe with seemingly no end in sight. The one reprieve is that the Brexit negotiations are to continue now till October with the UK set to participate in the upcoming MEP elections. Nevertheless, the FTSE All-Share Index rose through March gaining over 6.4% and being the best performer into April out of the EU as global asset managers look to re-allocate and increase exposure. M&A activity was the big theme supported by the ever-weakening sterling (i.e. Sainsbury with Asda, Whitbread demerger from Costa and PE activity picking up with Apollo making an all cash offer for FirstGroup) which also created some positive momentum for the FTSE 100.

Retail continued to be the laggard hampering overall market returns. Despite all this, surprisingly good numbers came out with regards to employment, now the lowest in 45 years and GDP growth beating most expectations. Toyota also announced plans to build a new hybrid manufacturing facility giving some positive news to a fledgling manufacturing sector. 

Elsewhere in Europe, the news was not so good with manufacturing showing its worst downturn in six years and the ECB continuing to increase liquidity through cheap loan facilities. On the political front, the turmoil continues to unravel as Italy rolled out its red carpet for President Xi as it seeks to further strengthen its relationship within the context of the belt and road initiative as well as hedging against a souring relationship with the European heavyweight Germany. In the Netherlands, the populist anti-immigration party of Thierry Baudat gained control of the Senate. 

From an equities perspective, Eurozone equities continued to be rather uneventful with German DAX rising about 10 bps and the French market doing around 2% (although it has done commendably from a YTD perspective - rising about 13%). 

Asia & Emerging Markets

Emerging markets continued to be a mixed bag through March, Russia being hampered by USD strength and the announcement of a new round of US sanctions while Turkey and Brazil showed signs of increased volatility as investors continue to grapple with pricing in policy uncertainty and inflation. 

Asia performed stellarly, Japan showing signs of momentum as a result of reduced geopolitical risk (i.e Korean Peninsula) and the weakening yen. The Chinese government's policies, embarked upon in 2018, are also coming to fruition. The structural reforms in the form of reduced VAT and increased fiscal spending especially across local governments have been a boon for growth and investors remained optimistic about growth prospects in adjacent economies (across South East Asia) that are likely to see substantial benefits flowing through. In addition, the gradual de-escalation of trade tensions is also prompting foreign investors to reconsider the markets. We remain optimistic about a deal (even if watered down) given that 2020 will be an election year.

Australia

Closer to home, the ASX has performed moderately well through March tracking its global counterparts higher led mainly by the miners and materials stocks on the back of renewed momentum in commodities prices (again related to the evolving China stimulus story). Markets also benefited substantially by a slow decline in the unemployment rate and buoyed by the RBA’s neutral stance. It is looking increasingly likely that a rate cut is on the table again, despite a palatable growth rate (2.3% p.a.). The big concern remains household spending and the falling dwelling investments.