Market news | 29 July, 2018

The peculiar year for equity

Raúl Rendon Portfolio Manager

This has obviously been a peculiar year, with differentiated movements; equities have been range-bound in the US, but sustained sharp corrections in other markets. A snapshot of newsflow so far this year shows:

 

  1. Protectionist policies, ranging from the U.S. imposing trade duties on a number of countries (increasing in respect of China) to trade talks (NAFTA)
  2. Geopolitical tensions, with South Korea’s position or the U.S.’s withdrawal from the Iran nuclear deal, among others.
  3. The polarisation of political parties in peripheral Europe, with opposing stances on how to address immigration that have even led to a certain fragmentation of political parties.
  4. And currency pressure in emerging economies, and elections in various geographic areas like Paraguay, Colombia, Mexico and Brazil.

 

What’s more…?

All of this has come amid U.S. monetary policy normalization, with hikes in key interest rates, and restrictive monetary policy measures in China (which have eased recently).

The trade war seems to be at the heart of the current debate and arguing over who’s at fault or who started it is not the least bit constructive. As I see it, the “trade wars” or whatever you want to call them began during the big crisis. What can we call the fact that over the past 10 years several developed economies have attempted to weaken their currencies in order to prop up their economies?

Haven’t central banks influenced fx markets to achieve their inflatin targets or curb their deficits to the detriment of other economies? Do you remember Abenomics to weaken the yen? Or the move by the Swiss National Bank (SNB), which removed the floor under the Franc vis-à-vis the euro?

Sell in May and go away?…

The answer might be too obvious. After all, why be exposed to equities? Aren’t U.S. protectionist measures high, comparable only to those imposed during the Nixon administration? All this begs more questions than answers, and nobody really knows what will happen.

Perhaps the only truth is that in a traditional trade war -via duties- there are no winners and everyone (we) will all come out worse.

A little late to be bearish…

I remember that, at the beginning of the year, the situation was diametrically opposite to the current situation. Optimism was soaring and markets’ upside potential was grabbing the headlines. This upbeat attitude seems to have evaporated and investors are now more skittish with respect to risk assets.

The current economic cycle is lasting long and we are likely approaching the end of the expansion stage. Nevertheless, there is nothing to suggest that recession is near. In fact, the economic surprise index is turning upward again (see chart), creating an environment that could support performance by equities. Moreover, the upcoming earnings season is important, with forecasts pointing to average growth in profit of 20% year-on-year.

A number of sentiment indexes are depressed and if history is anything to go by, this bodes well for upward movements by markets in the near future. This does not mean we can let down our guard in any case, but rather we should seek a balanced portfolio sector-wise, taking advantage of any market opportunities.

Today, like always, it is important to keep in close contact with your financial advisor so you can build up a balanced investment portfolio that enables you to achieve your financial goals.