Equity strategy and market outlook – February 2019

In this month’s strategy piece, Alastair believes that a snap-back in risk appetite in 2019 to date has surprised the over-cautious. The US Fed pausing interest increases was the first box ticked for improved sentiment. With US President Trump now declaring substantial progress in trade talks and a delay to increasing tariffs on Chinese goods, an entente seems increasingly likely, which appears to be perceived by investors as another box ticked. Furthermore, Brexit looks headed for a soft-Brexit deal, or delay – a further box ticked. Finally, the data are still tentative but the pace of earnings downgrades seems to have eased markedly in recent weeks. Yet with most of the risk factors ticked off we only expect markets to be supported at current levels in the near term rather than make further strong gains as valuations are now meaningfully higher than at the start of the year. We believe volatility is likely to decline over the coming quarter as improving economic data (merely) validates the sharp move higher in equity and credit markets, improving the prospects for corporate activity such as mergers and acquisitions.

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