The Multi-Asset Process

April 2019 Market Review

Markets continued to climb the proverbial wall of worry over April and the S&P 500 was back into record-setting mode, moving past its previous all-time high set back in October 2018.

We retained our focus on emerging markets, Asia and value funds as we prepare for the next phase of markets and continue to believe the US is relatively over-valued. US equities have only ever outperformed the rest of the world’s index by the current margin in one other period during my career, which was the TMT boom of the late 1990s. We are expecting some reversion to the mean over the months and years ahead.

Amid a relatively quiet April in macro-economic terms, at least compared to recent Brexit-centric months, the stock market rally has taken on fuel as global growth appears to have started bottoming out. First-quarter GDP numbers in the US showed a pick-up in growth to a stronger-than-expected 3.2% annualised compared to 2.2% over the previous three months; under the surface, the picture was less rosy, however, with underlying domestic demand rising at the slowest rate since 2015. 
 
The US earnings season is in full swing and while we have seen a general trend towards upwards revisions, there looks to be little in the way of growth, casting doubt on double-digit forecasts for next year – especially in the face of rising wage inflation. 
 
As was the case for most of 2018 – before panic erupted in the fourth quarter – this market ascent came despite little immediate progress in the usual distractions of US/China trade tensions and Brexit. We also saw the market shrug off events in India/Pakistan, Venezuela and the Ukraine, which we would group under the broad ‘noise’ umbrella.
 
While there was no substantial progress in the US and China trade negotiations, Chinese President Xi Jinping did devote a large part of his annual speech at the Belt and Road forum in Beijing to domestic reform, pledging to address state subsidies, protect intellectual property rights, allow foreign investment in more sectors and avoid competitive devaluation of the yuan – all four of which are areas of focus for the US in trade talks with Beijing.

Negotiators led by US Trade Representative Robert Lighthizer were scheduled to return to China in early May as both sides work toward a face-to-face meeting between Trump and Xi and there looks to be growing pressure to get a deal done.

As and when something is inked with China, President Trump appears primed to turn his attention to Europe, with higher tariffs on imported autos threatened to bring the EU to the negotiating table on agriculture.

On Brexit, after the scheduled exit date of 29 March passed, April was fairly quiet as politicians retreated to plan their next moves. With little sign of the stalemate breaking, there is growing debate about whether the UK will leave at all – and fears are growing that the new populist Brexit party could win favour.

This concern is also rising in Europe, where political risks are likely to flare up again after the EU parliamentary elections in late May, which could result in gains for populist parties and pave the way for new elections in Italy later this year. Spain’s election at the start of May might provide an indication: after weeks of the resurgent far-right dominating the headlines, the ruling centre-left was ultimately victorious – albeit without a sufficient majority to govern. Financial markets and the EU would like to see the Socialists team up with the centre-right Citizens' party but a more likely partnership is with the anti-austerity Podemos. 

The Vox party became the first far-right grouping to win more than a single seat in congress since Spain returned to democracy after the death of General Franco in 1975. Promises to "make Spain great again" sound familiar and echo the growing tide of extremism we have seen around the world.

April was also quiet on the central bank front, with the Federal Reserve and Bank of England both due to meet in the early days of May. We have discussed the Fed’s U-turn in previous months and there is little more to say here, other than the fact that with this more dovish policy a key factor behind the recent market rebound, any further good news on rates – including a possible cut later in the year – looks to be priced in. 

In the latest of his regular suggestions to the Federal Reserve – just a day before its policy decision – Trump suggested that if the bank cut rates by one percentage point and resumed bond purchases, it would boost the economy “like a rocket”. While the President seems incapable of differentiating between the economy and stock market, we hope the Fed continues to hold its line: taking a risk with inflation to boost asset prices when the economy is doing fine is not sensible.

We feel the environment remains decent for risk assets, with global growth around trend and nothing to scare anyone on the inflation front. As stated, we believe the Fed’s policy U-turn is now fully reflected in markets and we are waiting at the crossroads for signals of strength or weakness from here.
 

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Tuesday, May 7, 2019, 12:04 PM