The R&M FOURcast: November 2019
Welcome to our monthly macro update, giving greater insight into our outlook for investment markets and the investment ideas that currently interest us. We are well known for our dynamic approach to investing assets, adapting our clients’ portfolios to the prevailing market conditions to manage risk and take advantage of opportunities to earn return. It’s a proven process, and we have a successful 15-year track record of applying it.
- Notwithstanding continuing volatility, we believe we are in the Stable phase of the market.
- With global valuations looking broadly fair, credit conditions still supportive and economic expectations starting to improve we are positive over a 12 to 18-month horizon.
- Despite continued headlines about slowing global growth, various forward-looking indicators started to show signs of improving over the month.
- Against this backdrop, on-risk assets generally delivered small positive gains.
There has been no fundamental change to our view, and we continue to believe that markets are still supported in a Stable environment:
- Valuations are a little more expensive although still broadly fair. US markets are now tending towards overvalued, with valuations of Technology, Consumer and Telecoms stocks appearing stretched. More cyclical areas of the market, including Emerging Markets, Europe and small cap companies, offer better value although are also more exposed to slowing growth.
- Credit conditions remain supportive, with US corporate credit spreads having fallen over the month, offsetting the increase in treasury yields that we saw. Lower borrowing costs are generally a positive sign for risk markets and our best indicator of short-term conditions.
- We expect Economic conditions to improve over the next 12 months or so, and we believe we may be reaching a turning point. With huge stimulus across the globe, there are some early signs that this is feeding through into expectations about future activity. Admittedly these improvements are coming off a low base, but markets react favorably to improvements in expectations – and we think this could be a key driver for on-risk assets over the next year.
Are We Seeing the Light at the End of the Tunnel?
It has been hard of late, if not impossible, to hide from the ubiquitous headlines about a global growth slowdown. But it looks like there is respite ahead. Although headline growth numbers have been slowing, forward-looking surveys are faring better and suggest that the pressure could be easing. Data releases in the US and China recently delivered some welcome surprises.
With the quarterly corporate reporting season in full swing, investors will be breathing a further sigh of relief that results are not as weak as many had expected. Yes, aggregate earnings are down marginally, but close to three quarters of companies have beaten analysts’ estimates so far.
Time for a Truce?
Although Trump suggested progress was “a little bit ahead of schedule, maybe a lot”, the developments in US-China trade talks were limited. The likely outcome for the so-called Phase One agreement seems to be a truce in which the US suspends scheduled tariffs, and in exchange China offers some (very modest) concessions. There seems to be little hope of a deal rolling back prior tariffs any time soon, although markets reacted well to the Phase One progress.
The Monetary Policy Engine Keeps on Chugging
In response to lackluster headline growth and the ongoing trade war, global central banks have been easing on a major scale this year – and October was no different. The Bank of Japan and the Bank of Canada hinted at potential rate cuts, whilst the US Federal Reserve decided to cut rates for the third time this year and the European Central Bank restarted its printing presses. Similar action was taken in Australia, Singapore, Hong Kong, and scores of other developed and emerging market countries, in what appears to be the most significant synchronized easing in years.
Implications for Portfolios
We continue to believe conditions are supportive for risk assets in the near term. We believe some of the risks we have spoken about in recent months are staring to abate, but need further confirmation before we change our views. While this may not change our view of the market phase, we think it could lead to a change in market leadership – and we expect this provide some significant opportunities soon.
There are a few broad sectors on which we are focusing our attention. As well as these being areas which we think will be significantly supported by a strong rise in economic expectations, they happen to be areas where valuations are cheapest. This alignment of undervaluation combined with strong support doesn’t come around that often, hence why we are excited about prospective returns over the next year!
Our Recent FOURcasts
Long-term corporate bond yields stayed relatively flat for the month and have remained relatively flat since September. During November, increased confidence in a China/US trade agreement pushed US stock prices higher. With liabilities discount rates remaining level and an increase in US equity markets, most plans should have seen a slight increase in funded status for the second month in a row.
The Society of Actuaries (SOA) published new mortality base tables and a new mortality improvement scale in late October. These new releases are likely to result in relatively small changes to plan sponsor income statements and balance sheets, and will most likely start to impact minimum contribution requirements in 2021; in most cases, these small changes will be favorable to plan sponsors.
Despite the Fed lowering rates in October, long-term corporate bond yields stayed relatively flat for the month. At the same time because of a relative calm on the geopolitical front, equity returns posted a decent month led by international and emerging market stocks. When taken together, most plans that have some return seeking assets in their portfolio would have seen funded status increases over the month.