The economic and political climate is glum, and things continue to worsen. Although we do not predict a recession in the foreseeable future, we nevertheless cannot identify any factor likely to reverse the cycle.
We recall that we had already reduced the European equity exposure in our portfolios on 2 August because of the Fed’s return to a more neutral and less proactive stance, as well as mounting political risks linked to a hard Brexit and new elections in Italy.
The Fed and the ECB have managed to firmly establish lower interest rates while pushing risk assets higher. Investors are sceptical amid high political and economic uncertainty but, at least for the time being, the central bank actions have helped distract markets from the mixed fundamental picture.
Any drop in risk assets like the recent retreat in May is always an invitation to review the situation with a view to reassuming risk. This is particularly tempting today as the rally earlier this year might have more mileage.
“I am prepared for the worst but hope for the best”, said Benjamin Disraeli, a distinguished British prime minister in the 19th century.
Equity and bond markets have staged an impressive rebound since January; what is equally impressive is that this has been accomplished with practically no shift in fundamentals and fund flows. The fourth-quarter sell-off was caused by central bank action and so was the rapid recovery seen in recent weeks.
The risk asset rebound continued in February with not much investor conviction, judging from the modest equity market inflows since the beginning of the year. This is hardly surprising because, apart from central banks reverting to a neutral stance on interest rate rises, fundamentals have not radically change since...
Central banks are continuing to dictate market momentum and never more spectacularly so than in January.
Fundamentals will be back in 2019
2018 is not yet over but it is already time to take stock. We have been most struck this year by the fact that market falls have been so widespread. In fact, we have to go all the way back to 1994 for such negative returns on both bonds and equities.