Note Précis April 13,2019: Q2/2019 – Conundrum Rests With Central Banks: Markets appear reverting in early Q2/2019 to in this cycle, once more focusing on quantitative ease, momentum and taking cues from the United States amid slowing global growth. Just a cycle or two prior to this one and from central bankers, gaining currency in the 1990s was the notion of the conundrum of capital markets demanding extra risk premiums. After a decade and more of massive quantitative ease about which the latest statements appear to indicate extension, the present conundrum may rest with the central banks. Irrespective of responsibility for the leadup to credit freeze by 2008, the initial rationale for quantitative ease was clear and understandable. Now amid increased political volubility to boot, and whether inadvertent or deliberate, central banks appear reflexive about market twitches even in its normal role of allocating capital while metering risk. A portfolio implication is that momentum activity in markets may be extended therefrom but the imperatives of a quality and diversification tilt remain.
Such market realities make diversification essential, including above benchmark cash and shorter duration fixed income to be supplemented by precious metals in asset and equity mix. The yield on 10 year U.S. Treasury Notes at 2.55% is above the cycle lows of 1.36% but close to 90 basis points below recent highs, with many sovereign and other fixed income yields following. Within underweight fixed income, in addition to shorter duration, we favor emphasis on high quality corporate paper. In light of the yields and liquidity available, North American currency fixed income should be in favor within global fixed income mix.
With practically universal heavy weightings in indices, developments in financials underscore their crucial role for equities. On core growth and defensiveness dependent on meeting business challenges, we favor Information Technology. We have moved Healthcare up to market weight over Consumer Staples and Utilities. In cyclicals and despite stress, we favor Industrials over Consumer Discretionary. Despite recent prominence being given divestment of Energy, we overweight it. These sector aspects also hold the U.S. markets in good stead compared to Europe, for instance while emerging markets should be in favor for growth within global equity mix. 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.