I’VE BEEN too timid this year. If equity markets sustain this pace, then 2019 will mark the best year for investors ever. I should have owned more.
Gone are concerns of an imminent global economic and profits recession - fuelled by attempts to tighten monetary policies and various geo-political spats – that saw equity markets suffer historic falls in December.
In their place is optimism built on easier fiscal policies, most notably across Europe and in China, and a benign monetary backdrop – no central bank wants to raise rates any time soon. The prospect of the US and China finding common ground over trade is another positive.
The global economy is turning up, corporate profits are beating estimates and equity markets have surged, returning around 16 per cent year to date. Is it too late to buy?
At face value - and it seldom pays to over-analyse - markets look set fair. Investors are sceptical, but in most major economies macro-economic policies are supportive and company earnings are growing.
What’s not to like? Yes, prices have jumped a lot, but ratings, below long-term averages, are undemanding.
Looking for negatives, this move could prove self-defeating if equity markets get giddy and central banks feel compelled to intervene. This threat is strongest in the US and China.
The US Federal Reserve’s recent move onto a ‘patient’ policy stance, which projects no rate rise this year, would be challenged by signs of inflation. For more than a decade, the US economy has appeared weak in the first quarter before strengthening over the rest of the year.
True to form, early in March various measures suggested that the economy had stalled. Several weeks on and the first official estimate of first-quarter growth (annualised) has come in at 3.2%. Impressive perhaps, but this report has been boosted by a jump in stock building and net exports rather than buoyant US domestic consumption. If this worries the Fed, then it’s because of the weakening of domestic demand.
Until last summer, policymakers in China had been applying measures designed to let air out of the Chinese credit bubble. It is impossible to fine tune such moves and policy phases invariably continue until the pips squeak - which they did. Thereafter policy swung – strongly – into reflation mode and it is working. Arguments to buy domestic equities built on renewed optimism over economic growth and corporate profitability gained added impetus from the decision of major index providers, such as FTSE and MSCI, to dramatically increase their China weightings. With trade tensions easing, the most immediate worry centres on when the policy focus moves back to bubble deflation. This shouldn’t be a concern for 2019.
Europe worries those investors seeing precedent in Japan’s struggles of the past 30 years. Nonetheless, despite being hit by general weakness in global trade and specific issues generated by emissions controls, the eurozone economy, helped by easier fiscal policies, is showing enough signs of life to challenge the many investors that abandoned hope over the winter.
Overall, those worrying about weak final demand should remember that economies naturally grow, one should note the resilience of the UK economy in the face of incredible uncertainty.
I’m not alone in having been too cautious. Various analyses highlight that this sharp rally – the best since the immediate aftermath of the credit crunch - is participation-lite as investors maintain high cash balances and defensive stock tilts. Investors may well sit this one out, chastened by the savagery of last year’s sell-off as they wait for a recession to hit. With sell in May, however, debunked as an investment hypothesis, this rally should continue while the global economy continues to improve and virtually free money from central banks remains in bountiful supply.
Stephen Jones is chief investment officer at Kames Capital.
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