Investing

Is it about the journey or the destination?

We’re not dismissive of the caution flags being waved by markets….For now, though, we don’t see a need to veer off at the next exit.


Our Top Market Takeaways for the week ending September 13, 2019.

Markets in a minute

Flexing for days

Summer blues? None here. Stocks ’round the world rallied this week, and the S&P 500 almost hit a new high on Thursday. So what’s to thank for the positive vibes? Here’s our top five for this week:

1. Finally, some good trade news. China announced it will waive tariffs on some U.S. goods (like livestock feed, certain pharmaceuticals, and now even some pork and soybeans) for the next year—it’s the first time Beijing issued exemptions since the whole trade war kicked off. And that’s not all—the White House also revealed plans to delay tariffs scheduled for October 1 on $250 billion of Chinese goods for an additional two weeks. The moves come ahead of planned talks in Washington next week, and could be interpreted as good-faith measures to ease the ongoing conflict. We’re not getting our hopes up too much, though, as the two sides are still far apart from a resolution, and these developments could very well be just another chapter in what’s likely to be an ongoing trade war.

2. Rotation has been the name of the game. So far this month, sectors that are more exposed to the business cycle (often called cyclical sectors) have been leading the way, while more safe-haven, bond proxy sectors haven’t fared as well. This is a big change from August when we saw pretty much the opposite: Cyclical sectors weren’t feelin’ too hot, and more defensive sectors spent some time in the light. What to take from this? At some point, investor sentiment likely tilted a bit too negative, and recent positive news on the margin and the backup in yields have boosted more cyclical stocks. We don’t expect a big reacceleration in growth from here, but it looks like recent “recession obsession” went too far.

3. See-saws and swings. Amid the incrementally “risk-on” sentiment, U.S. 10-year Treasury yields have popped over 24 basis points since last Friday, now around 1.80%—the highest level in over a month. That puts this week’s move on track for the largest weekly change since 2016. If you’re feeling whiplash, we don’t blame you. We’ve seen weekly changes in excess of 20 basis points twice so far this year—we haven’t seen such moves occur as often since 2016.

4. Eas(ing) does it. The European Central Bank pulled out all the stops at its latest meeting yesterday, cutting interest rates for the first time since 2016 and restarting its asset purchase program (often referred to as quantitative easing) to prop up growth and kick sluggish inflation into gear. The Central Bank also signaled it’ll keep these accommodative measures in place as long as necessary, joining the ranks of a slew of other central banks around the world already pursing easing measures.

5. Brexit is (still) on the boil. UK parliament is officially suspended, and policymakers managed to pass legislation opposing a no-deal Brexit with little time on the clock. It remains to be seen how PM Boris Johnson will take action in response to this new law. If history is any indication, though, it’s likely the Brexit standoff will go down to the wire come the October 31 deadline. Uncertainty abounds, but we think an extension to facilitate a general election looks the most likely from here.

So what’s an investor to do? Read on for how we’re thinking about the current investment backdrop.

Spotlight

It’s about the journey and the destination

Despite this week’s more sanguine tone, it’s no secret that global economic growth has been challenged for the past year. Manufacturing activity remains in a rut, not helped by trade tensions and elevated inventory levels (after all, why make more stuff when there’s plenty of stock on the shelves?). So long as that remains the case, activity is likely to be subdued and central banks around the world are likely to be biased toward easing. The implications for investors are that interest rates (and bond yields) are likely to remain low, and that equity returns are likely to be muted, given valuations at or above fair value.

But here’s the worry: Economic conditions like these—where activity is slowing, but still growing—end up making investors feel nervous that a recession could be imminent. We don’t think that’s the case.

Try thinking about the current investment environment like you might a road trip, with your financial goals as the destination. Only instead of cruising at a respectable 60 mph like we were in 2017, traffic is slowing to 40 mph. Annoying, right? But at least we’re not at a standstill or, even worse, driving in the wrong direction!

Like we rely on our favorite navigation apps for the best routes to follow on a drive, we have confidence in three key investment themes that we think can help keep investors on track for achieving their goals:

1.    Participation with protection: After more than a decade of strong market returns (U.S. equities have returned over +400%, and global equities in aggregate over +300%), we think it’s prudent to stay invested with tilts toward more defensive and higher-quality assets. Growth slowdowns are reliably accompanied by market volatility (after all, accidents tend to happen when traffic slows down and bunches up), so diversifying portfolios with safe havens like gold, or investing in equities via derivatives with downside buffers, may make for a safer ride.   

2.    Harvesting yield: As we mentioned above, the valuations of many assets are at or above their respective long-term averages. That could mean that returns generated by capital appreciation (that is, increases in price) will be more limited going forward. As such, we think assets that generate income are particularly compelling right now. Finding attractive levels of yield has admittedly become more difficult, given the big move lower in rates throughout this year, but we still see plenty of opportunities—certain preferred securities, pockets of fixed income, high-dividend equities and real estate, to name a few.

3.    Finding growth in a low-growth world: Since global growth topped in the first half of 2018, stock markets have mostly moved up and down within a range. Under the surface, though, there’s been plenty of divergence between winners and losers. We think that areas of the market exposed to durable and accelerating growth trends are poised to keep outperforming the broad market. For upside, look to sectors like Technology—specifically companies driving the next wave of digital evolution, and Healthcare—specifically innovators in the realm of MedTech and Life Sciences.

Importantly, we’re not dismissive of the caution flags being waved by markets, and we’re watching the road ahead for signs that conditions could be deteriorating further. For now, though, we don’t see a need to veer off at the next exit. By aligning portfolios with these themes, we think investors can continue on the road to achieving their goals.

All market and economic data as of September 2019 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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  • The MSCI China Index captures large- and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). With 459 constituents, the index covers about 85% of this China equity universe. Currently, the index also includes Large Cap A shares represented at 5% of their free float adjusted market capitalization.
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