Economics and Strategy

Scaling New Highs?

— Sean Darby, Global Head of Equity Strategy

Through the summer doldrums, global indices bottomed out as investor sentiment turned positive with the MSCI World, a broad market cap weighted stock market index, attempting to surpass its February peak. However, the breadth of the rally has deteriorated with market leadership dominated by the U.S. while Emerging Markets (EM) have faltered. Just as importantly, the rise in U.S. benchmark indices has been accompanied by strong inflows.

The bifurcation in equity index performance during the current rally has been due to oil and a strong dollar which has undermined some of the emerging markets while China flirted with a mini-credit crunch early in the third quarter of 2018. Despite the ongoing trade disputes between the U.S. and other regions, there was no evidence that this had eroded global trade let alone sentiment.

Looking forward it is the move in U.S. Treasury rates that will matter as equities are long duration assets. Helped by changes to the corporate tax code, U.S. equity valuations have fallen while EM and European equities trade on fair multiples. Moreover, equities are enjoying a period of pricing power while better wage growth and capital expenditures mean a broader earnings base. We still prefer Japan, Central Europe and selective sectors in the U.S.