In March, investor’s nerves were again put to the test, especially those of investors who had missed part of the rally. Indices were again near maximums, although the slight improvement felt in the markets was in fact only a reflection of the more receptive attitude of two important players: the Fed and the parties to the USA-China trade negotiations. Other than that, the macro data was in general similar to that of the last quarter of 2018.
In a nutshell: freezing of rate hikes on both sides of the Atlantic ocean (for now) and rallies in defensive bonds and equity. Relaxation of Chinese tensions and gains for those companies that are more sensitive to trade tariffs.
So, have matters improved again?
In our opinion, the answer is NO. We are on the other side of the December looking glass, when valuations plummeted with no apparent fundamental justification. The current price hikes are also irrational and are most probably driven by the flow of momentum, quantitative algorithm, and technical analysis investors, who base their decisions on the assumption that markets have broken through the resistance level that was curbing the trend, which could very well turn upwards if the current market tendency consolidates.
Markets have rallied, but with a wide dispersion of returns: Defensive companies, generally large caps, are pushing indices upwards while more cyclical companies, that depend to a higher degree on global growth, are still in a bearish mood and discount storm clouds in the horizon. In the US, released data points to a slowing down of the economy –not a recession– although retail sales are no longer so upbeat.
In Europe, its main driver –Germany– has slowed down considerably, with ever-changing PMIs, some of which even point to a recession. Another of Europe’s principal drivers, the UK, is not only pushing against European interests, but also running the risk of seizing up and having to spend some time in the work shop. Also, a hard Brexit –an increasingly probable outcome– would have a direct impact on French GDP given the high flow of goods through the English Channel.
It seems that the English won’t manage to reach an agreement, even if they are sequestered like the 19 cardinals of the papal election of 1268, who after a year-long deadlock were held in confinement; and when they still failed to designate a Pope, had their food put on rations. As their dilatory attitude continued after this, part of the roof over their heads was pulled down making their stay somewhat less comfortable. Gregory X was finally elected Pope on March 27, 1272; 34 months later! The reasons why the English are now finding it hard to reach a deal is simple enough: If they chose the Norway option, they will have to agree to most European Directives and requirements, while not participating in their drafting as have until now (being part of the European legislative bodies). If they chose a hard Brexit they risk facing an irreparable fracture in the kingdom (Scotland, Northern Ireland…) and a severe recession initially. Having to choose between bad and worse; their predicament is understandable.
What does this scenario mean for investors? A similar predicament.
Prudence for conservative investors; an opportunity for more audacious ones. For our part, we lean towards prudence and have increased hedges, bearing in mind, nonetheless, that as long as monetary policies remain accommodating and recession is held at bay, markets may continue to improve.