World equity markets just finished a bumpy 3rd quarter of 2019, a period best characterized by mixed data, confusing central banks’ actions, and persisting trade war uncertainties.
While the US 10y – 2y Treasury yield-curve inversion in August led to recession fears and a flight towards safe havens, a sharp rebound in interest rates in early September (e.g. US 10y yields +30% in 2 weeks) resulted in episodes of almost violent style rotation into value.
As such stuck in a macro tug of war, a simultaneous presence of negative and positive forces, along with some ‘wild cards’ has led global equities to remain range-bound in their recent trading action. Investors risk running after the market as sentiment flips back and forth very fast, or perhaps too fast…
Negative forces
- Slower economic growth since same time last year
- US ISM manufacturing down to 47.8 from 60.8 (YOY)
- US Treasury yields down from 3.2% to 1.6%
- Global GDP growth expected to slow to 2.6% in 2019, from 3.7% in 2018
- “Bull markets don’t die of old age “… but still, the current recovery since 2009 is one of the longest in history (post-war)
Positive forces
- Employment indices as well as consumption trends holding well
- “Fed put” still alive : weak GDP numbers raise expectations of policy response
- Centrals banks may have less ammunition in a ZIRP World, but the power of China’s credit push or fiscal policies remains untested
And the ‘wild cards’
- The US-Sino trade war and its global implications
- Political uncertainties (Brexit, Trump impeachment, populism)
- Leverage in an extremely low rate environment potentially producing the “mother of all bubbles”
- Valuations: Global equities range between very expensive on some historical multiples to very cheap versus bonds … who’s right?
How to best position in such environment?
Our current positioning is still concurrent to a scenario of sluggish growth but no recession.
The “quality growth” premium has reached extreme levels, creating attractive entry points for some high quality, but cyclical stocks. Going forward, one may expect the markets to reach new highs over the next rolling year. Expect this to happen with an improved market breadth, as traditionally labelled «value» stocks should stop underperforming unless a sharp slowdown materializes.