Note Précis October 10,2019: Q4/2019 – Markets in Likely Transition: The capital market performance of the last twelve months differs from the popular day- to-day often dwelt upon. In the summer of 2019 amid expectations of slower growth and more quantitative ease, global fixed income yields have declined, even into negative yields for several European sovereign bonds. Still, that rotation has not had junk bond yields nor equities moving in lockstep with lower sovereign bond yields which instead have spawned volatility.
Several major central banks appear to be targeting more quantitative ease to boost growth but the impact remains uncertain as internal dissension rises. Political uncertainty seems elevating again in the Middle East, includes impeachment tussles in the electioneering United States, with dissension in Europe and tensions in several parts of Asia. Discordant domestic politics have reared for three of the largest financial centers, New York, London and Hong Kong. Impact on new offerings needs watching.
Momentum dispositions continue in capital markets whether in algorithmic trading, ETF activity or more classical forms. Fiscal deficits closing on $1 trillion appear in the United States and are elevated elsewhere. Negative yield sovereign fixed income apparently is close to $14 trillion in value. In otherwise underweight fixed income, we prefer short to medium term U.S. dollar and other currency holdings such as in Canadian and Australian dollar sovereigns as well as high quality corporate fixed income worldwide with positive yields instead of the negative yield variety that would benefit most from unchanged momentum.
In equity markets rationalizing appears of movements as being a derivative of the administered decline in interest rates and the suppression of fixed income yields. As well, higher dividend yields of indices like the S&P 500 and individually globally over U.S. Treasuries have received attention. Still, inter day and intraday equity market swings have been large. As corporate releases loom, consensus earnings expectations seem reduced. At present, valuations in equities seem elevated. The role of risk premiums is to provide a cushion, especially for unknown risks. We believe the political environment as well corporate assessments, individually and globally presage more selectivity in security, sector and geographic selection.
Amid selective credit stress, financials remain globally critical in equities and we favor the strongly capitalized. For defensiveness and value, we prefer stronger Information Technology over the traditional but currently hard pressed Consumer Staples. Despite recent weakness, we prefer to overweight Industrials over Consumer Discretionary in the cyclicals. We do prefer industrial alternates but overall have REITs and Utilities as underweight despite the consensus penchant for yield. We have Communications Services at underweight on concept media pressures, have Healthcare at market weight instead and favor strongly capitalized Energy.
Despite valuation and due to its heavy weight in Consumer Staples, Europe is unlikely to wrest market leadership from the United States. While we have above average cash weightings in asset mix, within equities we also favor the selection and diversity of the U.S. market, Japan appears interesting on restructuring and for growth, as do high quality emerging market securities.
Exchange rates between the major advanced countries appear relatively stable, potentially ephemerally so. Aggregate emerging country fixed income yields seem closer to 12 month lows but currency crises have appeared especially in Latin America and beyond. It suggests systemic risk to be global. We espouse higher than benchmark asset and equity weightings in precious metals and cash.