{"id":1786,"date":"2019-04-11T07:22:45","date_gmt":"2019-04-11T06:22:45","guid":{"rendered":"https:\/\/sarasinandpartners.com\/ie\/think\/market-view\/"},"modified":"2020-05-06T08:38:28","modified_gmt":"2020-05-06T07:38:28","slug":"market-view","status":"publish","type":"post","link":"https:\/\/sarasinandpartners.com\/ie\/think\/market-view\/","title":{"rendered":"Market View"},"content":{"rendered":"

As I write, Britain is applying for a second Brexit extension with little idea of its ultimate destination, the American-Chinese trade talks are unresolved and we have seen a run of largely disappointing economic data from China and Europe.<\/span><\/p>\n

The response from financial markets? Well, they have just delivered one of the best first quarters for equities in a decade alongside strong returns from government bonds, credit, high-yield, oil, commodities and most alternative assets1<\/sup><\/span>. In fact, of the thirty stock markets tracked by the Economist only one, Malaysia, delivered a negative return while more than half rose by more than ten percent. To compound this counterintuitive rally, G10\u2019s best performing currency this year was, yes, sterling\u2026<\/p>\n

Central banks, bonds and climbing a wall of worry\u2026<\/h2>\n

What is going on? Three factors probably lie behind the dichotomy. First, financial markets are adept at climbing \u2018walls of worry\u2019; having already discounted a protracted US-China trade dispute, an American government shutdown and a slow-motion Brexit last year, the outcome today is at least no worse. Second, the combination of poor economics and worsening geopolitics was the trigger for the most extraordinary volte-face by the Federal Reserve \u2013 in a matter of months the members of the central bank\u2019s rate setting committee went from projecting three interest rate rises in 2019 and two in 2020, to none in 2019 and one in 20202<\/sup><\/span>.<\/p>\n

The U-turn extended to the shrinking of their massive balance sheet which they described as on \u2018autopilot\u2019 to one that is now likely see any contraction largely fall away by September. Similarly, the European Central Bank (which seemed to have some urgency to tighten policy and begin the journey from negative rates) has now delayed any increase until at least 2020 and promises more \u2018special\u2019 bank support in the meanwhile. In short, central banks have been unexpectedly generous in 2019.<\/p>\n

Finally, inflation has been quiescent globally despite rising real wage growth and yet further falls in unemployment. In the UK for example, even though sterling has declined 8% against the dollar over the past year and unemployment is now at a 1971 low of 3.9%, consumer price inflation has fallen back to just 1.9%. This UK phenomenon (and it\u2019s a small and much needed bit of Brexit good news) is occurring globally, with prices below expectations in almost every major economy.<\/p>\n

This has contributed to an extraordinary rally in world bond markets - US 10 year yields are down twenty basis points this year while French and German equivalents have fallen nearly thirty (the latter moved into negative territory last month and briefly falling below Japanese yields). Against this backdrop, global equities cannot but look attractive with the yield on local indices relative to their corresponding government bonds is close to all-time highs. France\u2019s CAC 40 equity index for example yields an extraordinary ten times that of the 10-year French Government bond (and its bank stocks nearly twenty\u2026).<\/p>\n

Politics versus economics \u2013 who wins?<\/h2>\n

So what are investors to make of these conflicting forces? Yes, the global economy has disappointed, with the IMF cutting its forecast for global growth to 3.5% in January and likely do so again this month. Citigroup\u2019s global Economic Surprise Index, which measures how often data comes in better or worse than forecasts, has been in negative territory for almost a year (its longest sub-zero stretch since 2008). However, this is still far from recessionary territory and warnings from the very brief inversion of the US treasury curve are most likely false alarms (note last week\u2019s solid but not spectacular US labor report). For the Federal Reserve though, this corroborates their stance \u2013 yes, growth continues but there is still little risk of accelerating inflation.<\/p>\n

A rising populist vote will ultimately influence financial markets\u2026<\/h2>\n

So if the economic conditions are weaker but at little risk of recession, how will the political trends impact markets? Ignoring for a moment the day to day noise of failed Brexit \u2018initiatives\u2019 or Presidential tweets, there are three core trends that concern us:<\/p>\n