Equity strategy and market outlook – August 2019

In this month’s strategy piece, Alastair believes that over-optimistic expectations for US Fed easing and renewed trade tensions have rattled markets. The recent declines in global equities and rise in volatility since the beginning of August have highlighted yet again the headwinds of the US/China trade standoff, slowing global economic momentum and Brexit dynamics. The moves in bond markets over the same period have arguably been more significant. Reflecting fears that US Fed monetary policy is still lagging economic events, the US two-year/10-year yield curve slope is once again close to zero, indicating bond investors sense a recession coming. Familiarity with the risks could breed contempt, for the unwary. A challenge for investors is that none of the risks are ‘new’. Yet the absence of novelty does not make a risk less dangerous. The US/China trade conflict continues to escalate while in the UK, Brexit will come to a head in only a few weeks. Tension is building between value and momentum factors but we stick with our cautious outlook for now. Outside the US, equity valuations are slowly improving as many markets have delivered sub-par returns over the past five years even as corporate profitability has been strong. While possibly of interest to the long-term value investor, we remain cautious for the short term as incoming economic data remain weak and profits forecasts for 2019 are still under pressure.

Download PDF