March was yet another positive month for most assets and global shares added about 2 percentage points to previous gains (euros). However, economic data continues to be on the weak side and after the mighty rally, new drivers are needed. At the moment, we fail to see those drivers, at least short term, and keep the neutral recommendation between equities and fixed income.
Not only did equities have a decent month, but the fixed income space also enjoyed a boost from falling yields. Both EMD, HY and government bonds had returns to the tune of 1 per cent. Greed, one could say, is still in the driver’s seat at the moment, but the big question is whether the rally is sustainable given the furious bull run year-to-date. It is easy to get blinded by the bullishness and buy the positiveness, but we advise at least some caution as the market must grapple with a number of issues during the coming quarter.
On the economic front, things rarely change materially from month to month and we note that the data coming in is not showing any signs of an immediate turnaround. Starting with the bastion of strength, the USA, the fiscal policy fix from the tax cuts and budget deals is slowly wearing off, although some effects will linger during the year. So, a continued slowdown is to be expected, pushing growth towards the potential rate of somewhere around 2 per cent.
Focus on China's growth
Much of the market is centred on China. Whether the slowdown risks becoming a hard landing (sub 3 per cent growth) or if the Chinese authorities manage to stabilize the economy is one of the most important calls during the first half of 2019. Europe is also slowing down, partly due to China, and more pain may well follow in the short term.
Emerging markets, excluding China, are also affected by the slowing growth environment. This is most obvious in trade growth trailing off, especially with China. Overall, economic growth is slowing down, but the pace is expected to remain decent. However, should the deterioration continue, markets might have a reason to re-evaluate the rather rosy way it treats uninspiring economic data.
Since the famous Fed turnaround in late December, markets have been on fire. But for how long can this fact feed the bulls? Given the rally, a more benign monetary outlook should be, to a large extent, priced in by now, even with the confirmation of market-friendly policy from the Fed at their March meeting. We still have some worries about the lingering effects of what occurred during Q4 2018. We are not at this stage willing to discard the possibility that the monetary tightening during 2018 could turn up in the form of even weaker economic data in the coming quarters.
Accomodative central banks
Other central banks, such as the ECB, BoJ and PBoC, are all still in an accommodative stance, which will not change in the short term. For the time being, then, monetary tightening has definitely taken a step back. The key question is how much will this factor support markets after the rally.
On the earnings front, the year started badly. Lately though, it seems the most severe period of the downgrading might be over as earnings growth estimates have flattened out around a level of 4% for 2019. Is this the turn-around? We remain somewhat sceptical.
Looking forward, we need more clarity on both the economic front and in the earnings outlook. It is of course tempting to buy into the rally, but we have to account for the fact that it has been both fast and furious. With large parts of the losses during the fourth quarter recouped, pricing suggests that there is less to worry about than might actually be the case. While we do not see a full-blown recession in the making, some digestion of the rally is most likely. Thus, we think the path forward for markets is sideways. We stick to the neutral recommendation between equities and fixed income for now.
/Michael Livijn, chief investment strategist
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