Economics and Strategy

From Despondency to Euphoria in One Quarter

— Sean Darby, Global Head of Equity Strategy

Global equities have experienced a V-shaped rebound despite lukewarm data and muted earnings growth. Extremely risk averse positioning by investors and policy U-turns by the central banks have caused a rapid ascent in share prices.

The near 180-degree turn by the Federal Reserve ought to diffuse any concerns about deflation while providing global equities with a scenario of low bond yields, firm wage growth and subdued headline CPI. The missing link is earnings growth. However, judging the bottom of a growth cycle is an inexact science, especially when it never turned negative year-over-year. Oil prices remain the wild card but are not high enough to hurt Emerging Markets (EM) yet.

Investors continue to underestimate the “Reach for Yield” theme that has dominated asset allocation since 2009. Inflows into EM and high yield bonds are recovering while the dollar’s strength in blatant disregard of widening trade and fiscal deficits shows that U.S. assets still offer high enough real returns despite worries over 2019-20 growth. The Reach for Yield theme has become empowered as 1Q19 proceeded as inflationary pressures have receded.

We would expect global lead indicators and economic data to gradually bottom out through 2Q19. We feel the deflation and recession threat is overplayed while global equity financial ratios are generally in good shape.