Market update - March 2019
A summary of our current economic and market views
Rebound in markets but economic growth is slowing
We have seen a healthy rebound in equity markets over the first quarter of 2019, with global equities up 10%. Equity market valuations are no longer cheap and are trading in-line with long-term averages. We are seeing signs that global economic growth is slowing and are forecasting a moderation this year to 2.8%, from 3.2% in 2018. However, we do not expect a recession this year or next and there are reasons for cautious optimism. Signs that the US and China are moving closer to a trade deal is positive for risk assets. In addition, the Federal Reserve and European Central Bank have both pulled back from plans to increase interest rates this year. This should provide support to both equity and bond prices.
Slower global growth and trade concerns have resulted in downgrades to earnings growth forecasts for 2019. Companies in the MSCI World index are now expected to post profit growth of a modest 5% this year. While investors would not welcome further downgrades, lower expectations reduce the risk of earnings disappointments later in the year. Data on market sentiment similarly suggests that investors are in cautious mood. Closer to home, Brexit related worries have led to UK growth downgrades, with ongoing uncertainty weighing on sentiment.
We retain our exposure to global equities to benefit from continued earnings growth, although are becoming more cautious at the margins, taking profits where appropriate. We expect a return of market volatility, which may provide opportunities for long-term investors. While we remain underweight bonds overall, our view on the asset class is becoming less negative as rate expectations are peaking. We continue to like alternative investments for their diversifying characteristics and commercial property which continues to generate an attractive income relative to bonds.
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