Asset Classes in Q1 2019 and Projection for the Upcoming Period.
US and Global Equities
Stocks have maintained their growth as the global economy continues to expand, even if at a slower pace. Central banks continue to be wary of strangling growth and have opted to remain dovish until inflation threatens to spiral out of control. In the US, despite historically low unemployment figures, wage growth has not picked up to the level deemed sufficient by the Federal Reserve. Inflation has dipped below the 2% target after spending much of 2018 above target. This has cooled calls for the Fed to raise interest rates further to slow down economic growth in the US. The trade war with China is also a concern that threatens the potential growth of the American and Chinese economies in particular, and the global economy in general. With negotiations on how trade between the two countries will continue in the future ongoing, there is uncertainty on how economic growth and thus equity performance will play out over the next few months. This has not affected equity performance to the extent expected by negotiations with such large implications on both economies. The S&P500 has grown by 13.1% over Q1 while the S&P Global BMI has grown by 11.6% over the same time period. Investors are clearly bullish on growth to continue even in the face of uncertainty.
As investors do not seem fazed by the implications of the possible China-US trade talks’ outcomes, it would not be surprising to expect further highs for equities, especially US equities in the upcoming months. The dovish approach that central banks have taken further reinforces the notion that economic growth is not about to end just yet. We should expect to see equity gains extend themselves. However, the risks of a US recession remain and should not be discounted, especially given the string of yield inversions that have occurred recently.
As central banks have been wary of raising interest rates, bonds have similarly maintained rich valuations and have risen in value over the first quarter of the year. Despite the inversion of some yield curves at the end of 2018 and in March 2019, bond indices have continued to show stable yields. Predictions of a balance sheet recession in the US also seem to have been overblown so far, with high-yield bonds maintaining similarly stable yields. The outlook for bonds will depend on economic performance and how central banks choose to operate in the next few months. Given their cautious approach, even when faced with apparent inflationary pressures, we can expect bonds to have stable prices and yields. However, given that interest rates are still near all-time lows, the upside for this asset class is less than that of others, while the risks are fairly large should an unexpected downturn occur.
Commodities have, unsurprisingly, slowed down along with the slowing global economic growth. With China’s growth slowing down considerably over the past year and due to its trade war with the US, it is consuming relatively less natural resources to sustain its remaining growth. Thus, while commodity prices in Q1 have risen and pared much of their losses from the end of 2018, they are still lower than their average over the previous year. With the IMF projecting further slowing growth for the upcoming year, it may be a reasonable guess to expect commodity prices to not grow much during the upcoming few months. The risks of a US recession also contribute to a bearish view of commodity prices, which could lead to further reduced demand for commodities such as steel and lumber. And such a slowdown would have knock-on effects for countries that provide these commodities (as is the example of Canada which provides many of the commodities used by the US in its construction and growth.
Given the dynamics of the markets at the moment, it is worth considering investing in equities due to their strength despite the headwinds. Bonds are a safer option to park cash and so far have appeared to be fairly stable. Commodities present a less certain bet, and should only be approached by more risk-friendly investors.
Source from: MERatings