Our Quarterly Market Update was held in Dublin at the end of February. We were delighted to welcome guests to a panel discussion, where we reviewed the sharp fall in global equity markets from historically elevated levels, the impact of the coronavirus and our outlook for the year ahead. If you wish to fast-forward to the podcast, you will find the link at the end of this article.
The discussion was chaired by Senior Stockbroker and regular media contributor, Alan Breen with a panel comprised of Pearse MacManus (Chief Investment Officer, Merrion Investment Managers), Pramit Ghose (Global Strategist) and Laura Reidy (Head of Pensions).
With markets falling over 10% in the days leading up to the event, we began by looking at the impact of the coronavirus which had been the catalyst for an aggressive move in global equity markets from historically high levels. Markets had been trading strongly on expectations of better US & China trade relations and improving global growth. The panel highlighted that if an improvement in trade was the reason for the prolonged rally in global equity markets, the German market would be moving higher, but it has in fact drifted sideways since November. If higher growth expectations were the driver, transports (the companies that move all the goods around the US) would be outperforming, but they too have been stuck in a range for much of the last year.
The key driver in our view has been Federal Reserve balance sheet expansion, which the market sees as quantitative easing (even though the Fed insists that it is not). This liquidity expansion has driven headline indices higher, making it appear that the market is pricing in a rapid recovery in economic growth and earnings.
However, our panel was in agreement that when you look deeper, things look a little different with the general mix within markets being both very defensive (with cyclical stocks underperforming) but also the market breadth (a measure of the number of advancing and declining stocks, and/or their volume, to calculate the participation in a stock index’s price movements) being narrow, i.e. the market rally being driven by a small number of very large stocks. This can be seen in the latter part of 2019, where the US market rose by 6.2%, but one third of this move was driven by 9 stocks which represent 15% of the S&P index.
The big problem for the market of course is that at the levels prevailing in the week leading up to our event, a rapid rebound in growth and earnings was required to justify valuations. Indeed, expectations for earnings for this year have looked optimistic to us before the coronavirus impact. Markets now have to deal with the fact that we might not get that “V shaped” economic recovery, and the earnings growth currently priced in, looks almost fanciful. The key question for investors at this stage is whether enough has been priced into equity markets after the February collapse.
Head of Pensions, Laura Reidy spoke about the impact on the pension landscape in Ireland following the recent momentous general election, noting that pensions were one of the top three issues during the 2020 campaign. Since government formation is still ongoing a lot has yet to be determined. Laura examined what each of the political parties are proposing by way of pension policy reform.
In terms of the personal relief limit for pension contributions, currently individuals making personal pension contributions will receive tax relief. The limit is based on age and net relevant earnings, subject to an earnings cap of €115,000. Laura noted that FG/ FF are proposing no change while SF are proposing that the relief limit is reduced to €60,000. The Standard Fund Threshold (SFT) is the maximum an individual is allowed at retirement without accruing a tax liability. The SFT is €2m presently and the various party proposals were also examined. Potential changes to the minimum retirement age were also discussed.
Ultimately, there was agreement that we are in a low growth, zero / negative rate, high risk but also highly liquid world. So what are the key themes and ways to navigate current market conditions?
There are opportunities to be sought amidst the risk and volatility, in for example companies with strong returns on capital, sustainable structural growth, positive earnings momentum, strong dividend yield, with regulatory tailwinds not headwinds, and insulated from geopolitical risks. Sectors of note include global software, housing, payment providers, direct to consumer companies, branded apparel, utilities / renewable energy and diversified financials.
On the recent rally in gold there was further agreement that the precious metal still plays an important role within a diversified portfolio. Finally, the panel looked ahead to the upcoming US general election later in 2020 and the potential impact on global equity markets.
To listen to the Quarterly Markets Update podcast, please click here.
Alan Breen is Senior Stockbroker with Cantor Fitzgerald Ireland.
To speak with a Portfolio Manager or Account Executive, please phone the Cantor Fitzgerald dealing desk on 01 633 3633.
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