Note Précis September 4,2018: Forewarned Is To Be Forearmed – In the markets as elsewhere, to be forewarned is to be forearmed. Especially U.S. led, equities have been in a seemingly relentless upswing with little correction, valuation notwithstanding. Fixed income yields have remained low, with only the curious mix of U.S. Treasury, BBB Corporates and Emerging Market yields even close to twelve month high levels. Commodity prices appear beholden more to U.S. dollar exchange rates than other aspects like individual industry features.
Global annual GDP growth may be closer to 4% but imbalances loom ahead of the October 12, 2018 IMF/World Bank meetings. When considering the centuries before the 1930s, it is easy to see why far sighted politicians developed trade agreements, including friends and foes alike. The tangible benefits to prosperity now appear taken for granted or denied. Trade tensions seem taking on a political dimension in the United States and Europe while highlighting emerging country contradictions.
The central bank context of massive quantitative ease seems now of side effects, especially on exit. So far, fixed income yields have mainly been low enough for the dominant factor to be momentum, to-and-fro within and even without for example in commodity pricing. In the context of U.S. growth and its inflation, we believe the Fed to be behind the curve. For capital market valuations, change is likely to be a key factor.
The current mantra is at best a truism that valuation of equites is not excessive if growth remained strong and rates remained low. Market volatility is all about change. The contortions to justify valuations during bubble Japan in the late 1980s offered subsequently, sobering consideration. While consensus for the S&P 500 appears of 11% earnings increases into 2019, its long term sustainability seems still to be determined as is maintaining a trailing earnings P/E of 20x. In the current market cycle, geographical rotation strategies favoring Japan and Europe ostensibly based on lower valuation have failed to deliver amid slower restructuring in heavy weight Financials and large weights in Consumer Staples. Currencies have returned to flail emerging markets.
We expect higher volatility and more focus on value than momentum than seems in consensus. Investments should have a quality tilt with greater emphasis on sector and stock selection.
StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e.