Economics and Strategy

Risk Aversion Overwhelms Fundamentals

Global equities experienced a rollercoaster ride as sentiment shifts on the US-China trade dispute collided with a stream of Dovish commentary from central bankers. Risk aversion was a key theme last quarter as investors sold equities and poured cash into money market funds and US treasuries at a rate similar to that seen last December and during the 2008 Global Financial Crisis. Worries over a U.S. recession, deteriorating global trade and soft economic data led some EM central banks to break with convention and ease before the Fed.

Conviction levels among global equity investors is low, and this has been reflected not only in fund flows away from shares but also investors ignoring extremely attractive valuations. Furthermore, while economic data has reversed, there are no signs that the world is heading into a deflationary abyss with 1Q19 European wage data the best since 2009. Moreover, the drop in negative nominal yields has meant that real interest rates are extremely accommodative for financial markets, especially for equities.

One of the dichotomies confusing investors presently is the divergence between manufacturing and services data releases. The former has seen poorer announcements which disproportionately effect earnings estimates while the latter is experiencing ongoing expansion but there are few pure listed service companies. We expect equity investors to ‘capitulate’ and switch from cash to equities as earnings revisions become “less bad” over the next quarter. Valuations are very attractive in Europe, EM and within the S&P 500 energy, materials and industrials.

Sean Darby, Global Equity Strategist