2019 will mark an 'exceptional year' in financial markets, according to Charles-Henry Monchau, Managing Director - CIO and Head of Investment Management, Al Mal Capital. So why are there rumors that there is an imminent death of the equity bull market?
The global economy continues to be stuck in a phase of sub-trend growth with trade war and monetary policy dominating the headline news. Despite this uninspiring macro-economic background, 2019 is on track to become an exceptional year for financial markets as vast majority of asset classes are up on a year-to-date basis.
Too hot; too cold
It is indeed a very rare occurrence when equities, long-term bonds, Gold and Oil simultaneously register double-digit year-to-date gains. In 2018, diversification didn’t add much value as 95% of the asset classes ended in negative territory.
So far in 2019 we are witnessing almost the opposite event as an equally weighted portfolio invested into U.S equities, long duration U.S Treasuries and Gold is up 17% since the start of the year (as of the end of September).
As we move towards the end of the year, the key question for investors is whether the “goldilocks” conditions which took shape throughout the first 10 months of 2019 will prevail for the rest of the year and in 2020.
Indeed, risk assets are evolving within a very narrow path. The global economy needs to be strong enough to avoid sparking recessionary fears and weak enough to keep policy makers on hold. Any decline in U.S or global growth expectations could spur recession fears.
But should the Federal Reserve and/or ECB disappoint market expectations in the coming months, this could create some market panic as well.
Meanwhile, any geopolitical tensions such as trade war or oil price “melt-up” could further dent investors’ sentiment. If history is any guide, the later stage of the economic cycle is very often characterized by higher macro-economic volatility – and thus higher market volatility.
Future of the markets
Looking ahead, we believe that the global context remains favorable to risk assets. To the surprise of many, the next couple of months could provide an improving backdrop for global stocks.
Indeed, while 2019 earnings growth has not been favorable for equity markets, earnings momentum should improve across the globe in 2020. Meanwhile, moderate economic growth and dovish central banks should continue to support valuations.
We also note that market sentiment is not overbought as many investors have missed this year rally. Some cash might thus be deployed into equities before the end of the year and/or early next year. Moreover, the fall of bond yields has made equities more attractive on a relative basis and might trigger a new wave of share buy-back.
We thus continue to favor equities over fixed income but expect some volatility in the months ahead. Investors should prepare accordingly and avoid extreme tactical bets.
In terms of valuation, we believe that “irrational exuberance” can be found where the average investor is hiding – namely the two extreme segments of the market: long-duration bonds (as investors are over-pricing the risk of a recession) and hyper-growth stocks (because the global growth environment is weak, and because there is no inflation, investors are ready to overpay for earnings growth).
With global growth stabilizing, we believe this “barbell” portfolio could break down paving the way for outperformance by the undervalued segments of the market such as international ex-US equities, US small & mid-caps and cyclicals. Actually, a marginal improvement in global growth expectations and a weaker dollar could even open the door to a broader cyclical equity bull market.
Charles-Henry Monchau will be speaking at FundForum Middle East and Emerging Markets on 4th November. He will be speaking on Which Asset Classes / Products have Done Best in 2019.