As we look back at February, we asked the same questions that we did in January around global growth, corporate earnings, trade and Brexit. And we’re beginning to see the first signs really about what direction we’re going to go into for the rest of the year.
Will the recovery continue with the same momentum?
The recovery that we saw in equity markets in January continued into February. The questions remain, however, how strong really is the economic growth that we see globally? How is that translating into corporate earnings? And what can we say about valuations?
On the first point, economic growth has continued to disappoint, at least versus expectations, but we’re beginning to see some signs of improvement. We’ve seen some recent data from out of Europe that suggests at least some signs of green shoots, and the US continues to do okay if not spectacular.
On the earnings side, earnings overall have been a little bit disappointing and we’ve seen expectations for this year come down. Now, the possibility is that if we begin to see economic growth improve those expectations will begin to bottom out and that could be supportive for equities.
And finally on valuations, having seen a bit of a de-rating towards the end of last year, following the market volatility, we’ve seen valuations begin to increase over time. That suggests that some of the strong performance we’ve seen over the first couple of months of the year might become a little bit more muted as the year goes on.
Are trade tensions nearly over?
There’s been a lot of discussion about trade in recent months specifically the trade dispute between the US and China. The signs are now, however, that we could be moving towards an agreement between the two sides and that could see tariff barriers begin to come down a little bit.
This matters for global markets particularly because of its impact on global growth. Lower tariffs could see an increase in trade volumes and increase in investor confidence and in consumer confidence as well and that could help underpin the global economy.
So, when we think about that the question for us is really twofold.
Firstly, will there be an agreement – which broadly speaking is what markets seem to expect currently? And, secondly, to what extent is it already priced into financial markets?
Our best guess is that we will see a trade deal of some sort in the next few weeks and that should help underpin global growth, but the challenges of the US-china relationship aren’t going to be solved so simply and we would expect to see ongoing questions and issues over the coming months and years.
Why have you got an eye on inflation?
After a couple of months of relatively good results, we might conclude that financial markets are expecting the global economy and corporate earnings to improve and we might be beginning to see the very first signs of that in some of the recent data.
But it’s too soon to make that call and it’s something we’ll continue to monitor over the coming weeks and months.
One potential risk that we’re focusing on is actually around inflation – which is the rate of price growth for general goods and services.
Now, this might seem a bit surprising, after all inflation has actually been far lower over the last ten years than Central Banks might have expected and that’s allowed them to keep interest rates lower for far longer than they probably thought they would.
But we are seeing some signs of wage growth accelerating particularly in the US and if that were to translate into higher inflation it could prompt Central Banks to revisit their interest rate policy rather sooner than the market currently expects.
