Market update - May 2019
A summary of our current economic and market views
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.
The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.