We hosted the first in our series of Quarterly Markets Updates in Dublin at the end of July and were delighted to welcome guests to a panel discussion, sharing our thoughts on markets as we head into the second half of the year, and the key dynamics investors should be watching closely over the coming months.
The panel discussion was chaired by Senior Stockbroker and regular media contributor, Alan Breen with the panel comprised of David Beaton (Chief Investment Officer), Pramit Ghose (Global Strategist) and Pearse McManus (Chief Investment Officer, Merrion Investment Managers).
In determining the outlook for markets, a number of critical factors were highlighted as potential hurdles for further progression of what is the longest running bull market since the Second World War (the term bull market refers to an extended period were we see prices rising).
Without doubt the overarching focus of concern was the ongoing trade dispute between the US and China and its negative impact on global growth. Despite numerous false dawns for a trade agreement, the panel were of the opinion that the stand-off in negotiations was likely to continue for some time to come and as a result, the outlook for global growth would continue to deteriorate.
This downturn, particularly in Europe and Asia, has forced global central banks to completely reverse course from a tightening bias to an easing bias, as they aim to avoid further growth declines that could lead to a global recession.
Against this backdrop of further policy easing, bond yields have moved even further into negative territory and equity markets have advanced to levels that now look expensive. While markets can be expensive and still advance, the panel expressed concerned that any further market appreciation was on unsteady ground given the downtrend in earnings growth in 2019. This downward trend is likely to accelerate in the second-half of the year in the absence of a trade agreement.
Against such an uncertain growth outlook and in the face of further policy easing measures by global central banks, the panel is positioning their current portfolio to a more defensive sector bias focusing on stocks with attractive, well-covered dividend yields. In this regard, sectors such as consumer staples and healthcare offer attractive opportunities for investors, a point highlighted by Pramit Ghose as manager of the Global Equity Income Fund. From an individual stock perspective there were positive assessments for companies such as Glanbia, Sanofi, Danone and Johnson & Johnson which meet the panels current investment preferences.
Also highlighted were infrastructure investments which provide a thematic strategy as the potency of global central banks to stimulate economic growth via easy monetary policy fades. With the capacity for central banks to stimulate growth now diminishing, the focus for growth must come from fiscal stimulus which will be positive for the infrastructure sector (with for example spending on roads, hospitals and social housing schemes). While a central bank such as the ECB is unable to implement a fiscal policy, incoming president, Christine Lagarde, with her more market-focused background and as a former French Finance Minister will no doubt put pressure on certain European governments to implement stimulative fiscal policy.
The outlook for earnings for the remainder of 2019 remains uncertain. Following a bumper year for corporate earnings in 2018 boosted by US tax cuts and regulatory easing, earnings growth for the first half of 2019 has been flat to slightly negative. With the panel pointing to the severe slowdown in global manufacturing along with a sharp decline in corporate investment, the outlook for full-year earnings remains weak. Earnings in the more defensive sectors are showing positive trends compared to more economically sensitive sectors such as transportation and industrials which are most exposed to global growth trends.
Overall, the panel was united in its concern about the impact the trade stand-off between the US and China was having on the global economy, but in particular the trade focused economies in both Europe and Asia. Equally there was unanimity on the fact that against a slowing earnings backdrop, market valuations look high, and investors need to be very sector selective when looking to deploy cash.
With negative interest rates set to continue in Europe until at least mid-2020 (and possibly longer), and with large portions of the global sovereign bond market now offering negative yields, the focus should be on companies with strong balance sheets and well covered dividends.
While the overall tone of the debate reflected the panel’s caution over trade, monetary policy and market valuations, the audience was presented with a number of ideas on key investment ideas and avenues, to help them overcome the hurdles that face financial markets in the second half of the year.
To listen to the full Quarterly Markets Update podcast, please click here.
David Beaton is Chief Investment Officer with Cantor Fitzgerald.
To speak with a Portfolio Manager or Account Executive, please phone the Cantor Fitzgerald dealing desk on 01 633 3633.
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