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Monthly Market Commentary - May 2019

Jon Cunliffe, Charles Stanley Chief Investment Officer, offers his monthly market commentary

Jon Cunliffe

in Fiduciary news


April was another positive month for risk assets, with the MSCI AC World equity index returning 3% in Sterling terms, bringing the year to date return up to an impressive 13%.   What is interesting is that, unlike in the previous three months, we did not witness broad-based asset price inflation, as commodities, sovereign and investment grade bonds ended the month a little weaker.  The only fixed-income asset class to do well was high yield, which continues to correlate quite closely with the equity market.

With economic data remaining mixed, China being less keen on adding additional policy stimulus and much of the dovish shift by the US Federal Reserve played out for the time being, focus has shifted to the corporate earnings season.  First-quarter earnings have generally surprised the market positively with, for example, US corporate earnings growing in the region of 5% year-on-year, a positive surprise (against depressed expectations) of 5%.  Large US technology companies have generally led the way, with earnings growing at 7% year-on-year, a 6% positive surprise.  Whilst these earnings figures are much more modest than the heady days of the first quarter of 2018, they are nonetheless somewhat better than was anticipated in the dark days leading up to last Christmas, where a full blown earnings recession was discounted by the bears in the equity market.

With the evolving macro and policy landscape increasingly discounted in the market, we have moved away from broad-based asset price reflation to an environment where equities are increasingly likely to be driven by the corporate earnings outlook.  As a consequence, cross-asset correlations have been falling once more, which is a welcome development in the context of building diversified multi-asset portfolio.  However, it also highlights that the growth and earnings outlook is an increasingly important driver of equity markets.  With an already positive response to first-quarter corporate earnings releases and a growth outlook that remains mixed, there is somewhat less near-term upside in equities than was the case a few weeks ago and, on a tactical basis, we are looking for opportunities to reduce our equity exposure. 

If we look further ahead, and notwithstanding some shorter-term vulnerability in markets, the low level of bond yields continues to underline the attractiveness of equities on a 12-18 month time horizon and we do not anticipate that valuation prop falling away any time soon. 

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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