The month that closed out the first quarter of 2019 was marked by three key developments across the globe.
In Europe, the significant gap between the domestically and externally-oriented sectors of the economy persisted.
Domestic consumption and services remained solid, as indicated by purchasing managers’ indices (PMIs), while the industrial sector and exports continued to suffer on the back of China slowing, presenting a dichotomy within the European economy.
Germany continues to suffer most, due to the export-oriented nature of its economy. We maintain hopes for improvement but will need to see recovery in hard data out of China for these hopes to solidify.
The good news is we are starting to see green shoots in China. Chinese policy makers continue to take monetary decisions that support banking sector improvement so that banks will continue to lend.
Recently they have also taken measures to boost domestic consumption. Chinese authorities already raised tax deductions for households, which took effect at the beginning of this year.
Subsequently, VAT for high priced items and on corporations was lowered as well. This stimulus has already been reflected in Chinese PMIs, which are starting to bounce back.
We initially expected improvement in China’s economy in the second half of 2019, but now see cause for this happening even sooner. This is why Chinese equities been such strong performers.
In the US, all is holding steady by comparison, with the economy still on track to achieve 2.2% growth for 2019. The big change in the US has been the decline in funding costs for corporates as yield spreads fell, which is supportive of the economy and equities markets.
This has ushered in the return of the ‘goldilocks’ scenario, with positive growth, the absence of inflation and dovish central banks.
This hat trick is what is behind the rallies across financial markets in 2019 so far and has paved the way for a number high profile IPOs, where there have been some very sizable recent issues.
The remaining issue now is that valuations are high. As earnings forecasts continue to be revised downwards while market gains are in the double digits, a price ratio of 16x 12-month earnings for US equities is expensive.
In this environment, markets are priced for good news but we need to be cautious around current levels, focusing on investing in quality and taking very measured risk exposure in portfolios.
