Despite entering 2019 shrouded by an uncertain prognosis for the global economy, stock markets have actually been leaping ahead as investors regain confidence. After such an exceptionally strong start to the year, we ask whether they can continue on the front foot or whether it is time to take a breather.
Where we are today
The MSCI World Index has risen over 16% so far this year (FE data at 24th April 2019) as worries of a global slowdown dissipated. The Chinese stock market has been buoyed by hopes of an imminent trade deal and government stimulus, while the US has responded to looser monetary policy. Already China has agreed to increase imports of US goods and the US has postponed the implementation of tariffs.
The recovery from last year’s sell-off appears justified for now; China’s official GDP growth figures for the first quarter revealed that the economy grew 6.4% on an annualised basis, in line with the official target for the year of 6-6.5%.
In most regions, consumer confidence has received a boost from the expectation that interest rates won’t rise further and retail sales for March bounced back strongly. Meanwhile, in the US, corporate earnings for the first quarter have got off to a strong start. Expectations are low and, according to Factset, out of the first 15% S&P 500 constituents to report, 78% have beaten estimates.
Whether the popular adage ‘as goes January, so goes the year’ will prove accurate remains to be seen but current indicators are encouraging. However, the early surge may mean that a period of consolidation is on the cards.
What the experts are saying
The Bank of America Merrill Lynch survey of 200 global asset managers for March showed respondents to be overweight in the US for the first time in 15 months, with the positive outlook for profits cited as the main reason. Positions in Europe and Emerging Markets were reduced. The UK remained out of favour but sentiment has improved, with 28% of managers underweight versus 41% a year earlier.
These trends reflect a continued appetite for growth stocks, which dominate the US market, while investors have had little appetite for cyclicals and financials. However, average cash balances of 4.8% are still above the 10-year average of 4.5%. Overall, a net 17% of managers were overweight in equities, which is also low by historic standards, suggesting more cash could find its way into shares.
The Chief Executive Officer of BlackRock (the world’s largest asset manager), Larry Fink, has publicly expressed his belief that global stock markets are set for a ‘melt-up’ rather than a ‘melt-down’. Fink is optimistic that a ‘Goldilocks’ scenario of stronger economic growth and relaxed central bank policies will attract institutional investors into stock markets after months on the side-lines.
Where do we go from here?
There will always be economic and political issues to deal with. Just as one trade spat is resolved another can easily rear its head. Having seemingly resolved its differences with China, the US has now decided to impose tariffs on cheese and wine imports from Europe. The European Commission has been quick to retaliate with a list of US products it may subject to tariffs. Such disruptions are part and parcel of investing.
One thing to keep an eye on is late cycle euphoria- when investors pile into the latest fad for fear of missing out. In the US, there has been a flurry of Initial Public Offerings, including Lyft and Pinterest, with many more in the pipeline. Although many tech businesses are unprofitable, private investors are chasing them to big initial premiums which can quickly disappear. Another late cycle feature is a pick-up in takeover and merger activity.
However, what ultimately drives share prices is earnings growth and valuations. At present, earnings continue to grow which justifies current stock market levels (US indices have hit new highs this week). Analysts are paying close attention to outlook statements which determine their forward earnings forecasts. At this point in the economic cycle, stock picking is particularly important as some sectors and companies will do better than others.
Growth stocks are, in general, on high premiums so it could be the time to consider your exposure to cyclicals which are, in general, on much lower valuations. Moreover, many industries are being disrupted by technological, environmental and demographic factors which presents challenges for some but huge opportunities for others.
Letting a fund manager make the decisions for you
The past few months have shown how quickly stock markets can turn around. If we face further bouts of volatility, globally diversified funds with stable and growing dividends can help even out capital fluctuations.
One fund featured in our ISA guide is Premier Multi-Asset Growth and Income
, managed by Simon Evan Cook. This fund of funds focuses on managers with a contrarian, value style as well as regions and sectors that are out of favour with scope for recovery. This results in an underweight position in the US, and a preference for Europe and Japan. The dividend yield is 2.6%.
An alternative is M&G Global Dividend
, managed by Stuart Rhodes. He carries out fundamental research to identify companies around the world which fall into three buckets: quality, assets and rapid growth. The portfolio is, therefore, a blend of growth companies and economically sensitive cyclicals. It has nearly half the portfolio invested in the US but Rhodes is sensitive to valuation criteria and will not overpay. It currently yields just over 2%.
Experienced fund managers ignore the day to day noise of the stock market and remain invested for the long term. This is a sensible philosophy but if you are wary about investing after the recent strong performance, drip-feeding your money into the market on a monthly basis is one option available with Willis Owen.
Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.