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Key Themes – April

An excellent start to the year. Markets continue to rise with both equities and bonds showing strong positive returns. Some geographies such as the US, UK and Europe are now into double digit figures. The improvement has been driven by more accommodative central bank policy, fears allaying around a negative outcome from the US-China trade talks and an end to the US Government shutdown.

Now, the flattening of the yield curve in the US is attracting a lot of attention. This is understandable because historically it has been a leading indicator predicting softer growth. However, what has attracted less comment is US and European corporate debt spreads have narrowed; an indicator that stress in credit markets remain absent.

Meanwhile, inflation data remains in check. This provides strong support to the Fed turning more dovish after their earlier mission to raise rates; which caused upheaval in financial markets last year. At this point there looks to be little prospect of either a deliberate or accidental tightening of monetary policy to hurt growth soon. Interest rates are now formally on pause and the stabilisation of the Federal Reserve balance sheet will come three months earlier than expected, in October.

In summary the overall backdrop continues to be supportive for investors prepared to accept some degree of risk. Investors, judging by continuing high cash balances, remain alert to the many risks still present. The good news is that market commentators appear more willing to contemplate an elongation of the current cycle. This offers up potential for decent growth and moderate inflation. If existing productivity improvements continue to unfold, innovative opportunities await those investors investing in stock markets globally.

Each month, we sit down with our fund manager partners to obtain their forward views and positioning. We are in the favourable position of working with truly global managers with offices in over 200 locations. This is the way to research worldwide markets with analysts who are “on the ground”. We look for key themes and distinctive viewpoints. This what we share with you below;

• Our manager partners are ‘sensing’ the possibility that the current global economic slowdown is diminishing. They are picking up some positive signals –more country constituents of the OECD composite leading Indicators are turning up; Manufacturing PMI’s in China have increased; and M1 (money supply data) is growing again. They say it is too early to say growth is strengthening again, but suggest the signs are consistent with the slowdown bottoming out.

• Despite sizeable equity and bond gains our managers do not believe investors have become complacent. Since the dark days of the financial crash investors have remained distrustful and wary of risk. This seems to be case even now, which is healthy for all investors. The biggest risk is when investors are not being mindful of risk

• European equities have been supported by a more dovish European Central Bank (ECB) but remain dogged by growth worries. Germany seeing zero growth and Italy slipping into recession have not helped the investment case for Europe. That said, Europe relies on external demand. Therefore, fiscal stimulus underway in China will help to bolster growth moving forward. This area creates a dichotomy for our managers with some seeing a buying opportunity for an unloved asset class, others feeling they would like to see more visibility economically before dipping their toe back into the water.

• US earnings are expected to trough on the back of a tough Q4 ’18 when growth was weakening. The outlook now is more positive, with improved productivity insulating many businesses from wage inflation.

• “Value” stocks (often referred to as low price to book value or low price to earnings) are attractive to many investors, but value has markedly underperformed growth (the opposite of low price to book/low PE). A number of our managers say the performance and valuation gap is now extremely wide relative to history, with value stock price/earnings (PE) ratios now at more than half the levels of growth stocks. They do not see a catalyst to amend this but note the anomaly as a potential opportunity for long term investors

• 10-Year UK Gilts have seen yields dropping, falling to at one point under 1%, as investors look towards more perceived safe assets. Yields at low levels make gilts less attractive with some managers either trimming or completely selling out of their holdings.

• Alternatives continue to be attractive to our manager partners to find returns that are uncorrelated to both equity and bond markets. This adds diversification although equities overall are still the favoured way to access inflation busting returns. There is an acknowledgement amongst them all that recent returns have been disappointing but knowing that they need their diversification qualities when markets go through periods of turbulence.