After a difficult December, financial markets decided in January that the world wasn’t so bad after all.
We saw rallies in most equity markets, which has raised an important question: Has January set the tone for the rest of the year, or is it really just a small rebound in the context of a broader negative trend of slower growth and slower earnings?
After being whipsawed by markets in December and January, it’s important to ask how much has really changed. From the perspective of equities, we think in terms of the valuations and corporate earnings.
From the valuations side, we’ve seen better valuations than we have done in recent years, from the result of the recent sell-off in January and some decent earnings growth over the course of 2018.
In terms of earnings, however, even though we’ve seen growth, the outlook isn’t quite as good. We’ve seen steady downgrades to earnings expectations over the past few months and we’d like to see that begin to stabilise.
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As far as the economic backdrop is concerned, while we continue to see growth, it wasn’t quite as robust as it was six months ago. The recent data, particularly in the Eurozone has been a little bit disappointing. It’s in monetary policy that we’ve really seen the biggest shift in recent weeks.
What you need to know about monetary policy
In the United States, the Federal Reserve has indicated that it probably won’t hike interest rates in 2019. That’s a significant change to where we were eight weeks ago when the Fed indicated that it probably continue on the path of gradual but steady interest rate increases for a while longer.
In Europe, the challenging economic data has given the ECB rather less ammunition to start thinking about tightening monetary policy that it probably expected to have a couple of months ago.
No monthly update would be complete without Brexit. And again we have relatively little to say. The political environment remains unclear the outcome is still shrouded in doubt and all we can say from a portfolio construction perspective is that we’re comfortable that the global diversification that our portfolios have should leave them relatively well protected from the range of possible outcomes that still exist in the UK.
So markets remain quite finely balanced, in the short-term the concerns around earnings, around economic growth, and around politics will probably keep volatility quite high, but over the longer-term the opportunity provided by relatively attractive valuations shouldn’t be underestimated. That’s where we’ll be focussing our attention over the coming months.