2019 was an eventful year. The muddy waters of Brexit were finally cleared following a huge majority for the Conservatives in the UK election, which removed the tail risk of a hard-left government under Jeremy Corbyn. However, the difficult task of negotiating the free trade agreement with the EU has only just begun. President Trump kept markets on their toes with an escalation of the trade war with China over the summer, threats of additional tariffs on Brazilian and Argentinian steel imports, and finally a truce in the trade war with China. Democrats in the House of Representatives voted to impeach the President, although the subsequent trial in the Senate is likely to acquit him.
2020 is already proving to be lively for markets. Global equities look overbought or over-valued, put-call ratios (technical indicators used to gauge investor or market sentiment) suggest extremes of complacency, economic growth expectations look overly optimistic and market values look expensive.
The aggressive change in sentiment and market positioning over the last 6-8 weeks has been driven by a number of factors such as the immense provision of liquidity by the Federal Reserve, hopes that the trade truce will lead to a significant pick-up in global growth and earnings, and the removal of the short-term risk of a no-deal Brexit. The liquidity splurge by the Federal Reserve was designed to be short-lived, as a year-end liquidity position. How markets react to the potential removal of this liquidity will be key, but if the extraordinary provision of liquidity continues, the valuation of high-quality companies can remain elevated relative to what might otherwise be considered fair value.
Despite some pockets of strength in US data (employment for example), it is difficult to see a rebound in economic activity that would justify current market pricing. The announcement that Boeing would suspend production of its 737-MAX aircraft from January, for example, is alone expected to shave 0.8% from US Gross Domestic Product in the first quarter. Additionally, it seems inevitable that there was some front-running of orders ahead of the possible increase in tariffs, which should dampen the expected rebound in growth in the short term.
If economic growth does not improve substantially, the consensus outlook for a rapid rebound in earnings, with growth of approximately 10% expected for 2020, looks too optimistic.
Given our ongoing concern about economic data and valuations, at Merrion Investment Managers we remain underweight equities, with a defensive bias. Markets are pricing in a significant recovery in economic growth and earnings, which seems optimistic at a time when complacency among market participants appears to be high.
At Merrion Investment Managers, our focus into 2020 is on obtaining the maximum return available. We are active investment managers making active investment decisions, and our suite of funds can be accessed through your broker or portfolio manager.
As you will see in this month’s Investment Journal, changes are also being made to the Cantor Core Portfolio given the above-mentioned factors.
We are all looking forward to a busy year ahead for markets!
This February we will host our Quarterly Markets Update for a small number of our private clients. We will share our thinking on markets for the year ahead, with a particular focus on pensions and managing your investments pre and post retirement. To register your interest, please email EventsIreland@Cantor.com with your account number for reference. If you are not yet a client, please indicate this in your email and we can put you in contact with one of our advisors.
Pearse MacManus is Chief Investment Officer of Merrion Investment Managers.
To speak with a Portfolio Manager or Account Executive, please phone the Cantor Fitzgerald dealing desk on 01 633 3633.