Market update – July 2019
A summary of our current economic and market views
Markets enter the third quarter in strong form...
Stock markets around the world performed strongly in June, more than making up for the turbulence they experienced earlier in the quarter. Global equities are once again close to all-time highs supported by indications of easier monetary policy from major central banks and, more recently, signs of easing tensions between the US and China. Bond markets also benefited from the expectation of looser monetary policy, with yields falling in many regions. In mid-June, $12.5 trillion of bonds were trading on negative yields.
…but could now be more vulnerable
Firstly, though still positive, global growth is slowing. We recently trimmed our forecasts for global GDP growth in 2020 to 2.6%. In an environment of slowing growth, markets are more vulnerable to unexpected tariffs, diplomatic conflicts and political unrest.
Secondly, markets could be dislodged by shifts in expectations for interest rates and inflation. The US central bank is now widely expected to cut interest rates in the coming months. However, the Fed may see less need to cut interest rates if it judges that the risks of a US-China trade dispute have dissipated. Similarly, signs of higher inflation – which we expect to materialize over the course of the second half – could reduce the Fed’s willingness to lower rates. Both scenarios are likely to be negative for equity and bond markets.
Finally, this year’s resurgence in share prices means valuations are now again above long-term averages. The MSCI World Index trades at 16 times expected earnings, compared to an average over the past 15 years of 15 times. This does not mean that share prices will necessarily fall, but it may reduce the appeal of buying at current prices.
We remain invested in equities but have been taking profits where appropriate. Overall, our equity exposure remains at a level that is broadly in-line with our long-term target, allowing us to gain exposure to modest growth in corporate profits. And while valuations are higher than average, they are not at extreme levels.
We remain underweight bonds, given that the yields on offer from government bonds are below current inflation. This results in a higher allocation to alternative investments and cash. We continue to like the income-generating characteristics of commercial property and have recently become more positive on the outlook for gold, which can help protect portfolios in more difficult environments. Though markets are currently calm, we are prepared for higher levels of volatility, with a diversified approach to protect portfolio values and cash to take advantage of opportunities.
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.