In 2018, there was a deep-seated pessimism about the general health of the world economy. So far in 2019, some of the pressure on global stock markets has abated. What sort of opportunities may lie ahead for multi-asset investors?
As we see the world today, the likelihood of a global recession remains modest, notwithstanding some slowing of economic data and trimming of analysts’ predictions on corporate earnings and profits. But going on the performance of stock markets in 2018, and the valuations of companies listed in the likes of Japan’s Topix, Germany’s Dax, and South Korea’s Kospi, there was a deep-seated pessimism about the general health of the world economy. The Topix, an index of large-sized Japanese companies such as Toyota and Mitsubishi, lost around 17% of its stock market value last year. Investors, for the most part, ignored supportive factors like rising company earnings, improving corporate governance initiatives and an overall improvement in the domestic economies of Japan and the like. Instead many of these doomsayers confused moderating economic growth – growth coming down from very high levels in economies such as the US, the world’s biggest economy – with growth heading off a cliff.
To recap on 2018, as the year drew to a stuttering close the main driver of investor uncertainty and gloom was rising US interest rates and expectations that the Federal Reserve (The Fed) would continue to cool an overheating economy with so-called aggressive monetary policy. In other words, investors grew anxious of the prospect of rising rates and how this might put pressure on equity valuations. When interest rates become more attractive, investors can begin to seek higher compensation for holding other assets and this can cause their price to fall. We think this lay behind much of the turbulence across global stock markets in February and October.
However, so far in 2019, some of this pressure has abated partly because ‘The Fed’ has indicated that it won’t be as aggressive in its rate hikes in the future, instead adopting a more ‘patient’ approach. The fact that the inflation rate is very low is crucial to this view. However, more importantly, equity valuations become very depressed at year end and so it has not taken much good news to push up equity prices.
Which takes us to the question of investment opportunities. Interestingly, similar to the market of 2016, investor sentiment is still on the negative side. This has pushed the equity risk premium – the excess return investors are being paid to hold company shares and not safe-haven Western bonds – to a very compelling level and leading to some attractive valuations in many equity markets outside of the US. In this context, we like Japan, Asia generally, and European markets, although some sector-specific markets in the US (biotechnology, banking) can provide some level of diversification.
Generally, we view fixed income assets, apart from positions in emerging markets (such as Mexico, Indonesia, Brazil and South Africa for example), and US Treasuries, as poor value. For instance, 10-year Japanese government bonds are close to negative-yielding and, similar to German and UK government bonds, provide little in the way of portfolio diversification.