ASK THE EXPERTS

CAZENOVE CAPITAL’S PETER HILLER JOINS US TO ANSWER A QUESTION ABOUT EQUITY MARKETS

WHAT MIGHT WE EXPECT FROM EQUITY MARKETS FROM HERE?

ANSWER: Markets continue to carry a heightened level of uncertainty, primarily driven by fears of slowing economic growth, with the prospect of incremental headwinds from the trade spat between China and the US. Monetary policies are also having an impact as the financial system continues to slowly ‘normalise’ from a period of historically low interest rates and quantitative easing. It is reasonable to expect that a tighter liquidity environment lies ahead.

Historically, equity markets have started to discount recession in advance of it happening, but at the time of writing, it does feel as though the market appears to be somewhat ahead of itself. Two widely followed barometers of sentiment reflect this: the Credit Suisse Global Risk Appetite Index, which trades between ‘euphoria’ and ‘panic’, is currently in panic territory, while the spread between bulls and bears in the survey from the American Association of Individual Investors points to the same conclusion. When this occurs, typically markets recover.

Investors will continue to be concerned about the risk of recession in major economies; and increased market volatility is likely. Against this more uncertain backdrop we expect 2019 to be a year of low, but still positive, equity market returns.

Earnings growth forecasts remain susceptible to downgrades. In the US, 2018 growth was boosted by tax cuts. Trade tensions have the potential to be a headwind everywhere, but especially for Asia and emerging markets, while Brexit uncertainty will continue to weigh on domestically focused UK companies. It is unlikely that corporate profits will fall without a recession, and while there is the risk of a faster decline in economic activity than expected, we see healthy household balance sheets, a relatively high personal saving rate, strong labour market momentum and high business confidence. We do not expect a global recession in 2019.

Although we expect more challenging markets ahead, we also see opportunities for active managers to perform. PETER HILLIER, PORTFOLIO DIRECTOR. CAZENOVE CAPITAL, TEL: 0131 270 3004, PETER.HILLIER@CAZENOVECAPITAL.COM, WWW.CAZENOVECAPITAL.COM