Beaufort Analysis No. 312 – Charging into the New Year
After a tumultuous December, investors started 2019 cautiously. Global economic data pointed to a slowdown amid tighter financial conditions in the US. After the new year’s first full week of trading, markets appeared to have regained some of their vigour. Firstly, the MSCI All Country World Index went on a run of positive performance, cumulating in a +7.8% return in GBP terms since the lows of Christmas Day. Secondly, global growth equities outperformed value stocks by +8.3% vs. +7.3% over the same period, while US equities led the global charge relative to their European peers +9.8% vs. +3.8% in GBP terms, all measured by their respective MSCI indices.
The reversal in sentiment suggests investors were too pessimistic in December, and that they over reacted to economic news flow. It is likely that the Federal Reserve will now slow down the rate of monetary tightening in the US, providing a headwind to markets. Chairman Powell indicated that the central bank was willing to be patient in its desire to raise the Federal Funds rate and in the reduction in the size of its balance sheet; this was clearly influenced by the market sell-off in December. The degree to which policymakers are monitoring equity market movements was articulated by James Grant, Editor of Grant’s Interest Rate Observer, who quipped “James Carville’s endlessly repeated witticism about wanting to come back to earth because the bond market bosses everybody around is as dated today as the Clinton presidency. It’s the stock market that a politically ambitious person would choose to become in a second life.”
Other narratives driving market movements include the ongoing trade dispute between the Trump administration and their Chinese counterparts. There is speculation that the US President would be willing to strike a deal with Xi Jinping in order to avoid a new escalation of tariffs in March. This offered some relief for markets, but it is set against a backdrop of slowing world trade. Here certain corners of the global economy are particularly vulnerable. As the Chinese growth engine wobbles, the economies of commodity exporters like Australia and Canada are likely to slow. These countries are also experiencing increasingly heated housing markets and have gone for over 20 years without a banking cycle leading to the shares of their largest lenders coming under pressure in financial markets.
While markets have engaged in reflection and re-pricing following the December selloff, a variety of risks remain and must be navigated with care. Pro-cyclical asset classes may well enjoy positive returns this year, but the charge will need increased support from economic fundamentals in order to be sustained.