Market update - May 2019
A summary of our current economic and market views
06 May 2019
Another benign month in markets
The first quarter’s resurgence in global equities continued through April. Key to investors’ optimism is the supportive position of central banks, and the Federal Reserve in particular, in keeping interest rates on hold and giving clear guidance to that effect. The Fed’s position is helped by the fact that US inflation is falling, despite low unemployment which usually causes prices to rise. The overall picture is of a comfortable level of growth (the US economy grew 3.2% in the first quarter, well ahead of expectations), with currently little evidence of an uptick in inflation.
…but there are headwinds
We continue to predict positive global growth through the rest of this year and 2020, but it is slowing. Recent growth figures factor in an unusual build-up of inventory. In the UK, this appears to be linked to companies’ stockpiling ahead of unknown Brexit outcomes. But the trend of rising inventory is evident elsewhere, including the US. Without an underlying increase in future consumption or investment this boost will disappear, and growth slow.
The increase in oil price this year is likely to result in higher inflation in the months ahead and this could bring an end to central banks’ current “patient” stance on rates. In an environment where many businesses lack pricing power, higher energy costs could squeeze profitability.
Valuations now exceed their long-term averages
We are a long way from the gloom than engulfed markets at the end of 2018, but the subsequent resurgence in share prices means valuations have swung back above long-term averages.
While central bank policy is for now broadly supportive, a range of political uncertainties - including the US-China trade talks, due to reach an agreement next month - continue to add risk to a backdrop of declining economic growth. Higher volatility is likely to characterise the months ahead.
We are alive to the risks but maintain our exposure to global equities, while being watchful for opportunities to take profits where appropriate.
Given the likelihood of higher levels of volatility we continue to like the diversification offered by alternative investments. We continue to hold assets such as commercial property and infrastructure which generate an attractive income relative to bonds.