Investment market update - Is the world still a good place to invest?
For those who kept their nerve during Q4 2018 and did not sell equities, the sharp rebound in Q1 this year came as a vindication and welcome relief.
Markets worried about many problems from September last year (US interest rates, global economic slowdown, the US vs. China trade war etc) and this led to an overdone risk off bout in Q4. Markets bounced back at the start of 2019 without any news to propel them. They rallied further when the Federal Reserve (Fed) pivoted on its interest rate policy and President Trump promised a trade deal with China.
The markets however, have gone even further, anticipating a global economic rebound which may take some time to happen. In fact, this quarter’s returns may have borrowed somewhat from the expected growth in the second half of the year and hence we feel a little uncomfortable about chasing them. While we don’t disagree that things are moving positively in the right direction, we don’t necessarily think they will be smooth running:
- Interest rates and economic growth - The Fed’s interest rate policy is helping the US economy but investors have fully discounted its effects by now. This leaves growth as a market driver. It may take some time before we start noticing a recovery from the worldwide slowdown that started in mid-2018. Markets could hence live without a safety net for a while. We’d rather see new policy or economic tailwinds before getting too bullish.
- China vs. US - There is no doubt that President Trump wants to give voters another tax break by getting rid of the trade tariffs which have been borne entirely by US consumers. Likewise, the Chinese leadership is trying to stimulate its slowing economy and would love nothing better than being able to trade freely all over the world. The markets, though, may still be too sanguine about the upcoming US China deal. The devil may be in the detail.
Being mildly cynical, you could say that the US presidential election in November 2020 almost guarantees that the US economy will be doing well between now and then. Clearly, President Trump does not hold all the cards, with the House of Representatives in the hands of the opposing Democrats, but he can still pull levers that favour his re-election.
We still feel comfortable that there are good days ahead for equity investors, but whenever markets get ahead of themselves, it is only prudent to take a few chips off. That’s what we did during the quarter in our portfolios and we’re trying to keep some powder dry for the moment until it’s really worth adding back to risk.
How will Brexit affect sterling and UK stocks?
As we get closer to the final furlong on Brexit (whether 12 April or 22 May - as we write we do not yet know which deadline will apply), it is worth reflecting on UK investments. In terms of currency, the backdrop is simple - sterling will like a soft Brexit and push up if we head in that direction and vice versa for a hard Brexit. The large weight of foreign earnings in the FTSE will almost guarantee an inverse reaction of equities to sterling.
Within UK companies themselves, there are distinctions to make:
- Small companies tend to be more domestic and are less affected by the pound rising or falling
- Some businesses have prepared very well for various Brexit outcomes (buying or setting up subsidiaries in the EU, rearranging supply chains to avoid Channel crossings, or investing domestically or on other continents)
- Other firms have not prepared and been more complacent.
The task of the equity analyst is to tell them apart. We are reluctant to place a big bet on UK equities until the political fog clears up, and until then, we find that selective stockpicking makes more sense.
In conclusion, we don’t have the end of the cycle in sight and look forward to enjoying some more good quarters ahead, but any market that soars almost regardless of events, announcements and fundamentals, does require a bit of prudence, which is what we are currently exercising.
Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.
The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.
The information contained herein is based on materials and sources that we believe to be reliable, however, Canaccord Genuity Wealth Management makes no representation or warranty, either expressed or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein.
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IMPORTANT: Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.