Quite the quarter: Markets on the rebound

2. US and China court a trade deal

It’s clear that President Trump wants to conclude negotiations, while the Chinese authorities – facing a domestic slowdown and headwinds from an ageing business cycle – are also keen to get matters on a surer footing.

Positive news on trade negotiations is now largely priced-in by the recovery in asset prices, so any negative news could lead to a substantial wobble in confidence. We would see this as a temporary blip, though, and believe that momentum will continue into the summer.

We don’t know the details of any potential trade deal, if one is agreed. But an agreement would be positive for investor sentiment not only in Asia, but also in Europe’s export countries like Germany. This would balance somewhat the recent cautious view of spending plans and business outlook. Consumer confidence in various countries has already taken a hit and, although this is probably only temporary, it is a risk we are monitoring.

It’s worth bearing in mind, however, that while a trade agreement would settle markets in the short term, China’s ambitions remain a potential source of conflict with the US. As they pursue the goals set out in the ‘Made in China 2025’ agenda there will be further potential for sparks to fly.

3. US political instability perturbs markets

The perceived instability of the US government at the end of 2018 was exacerbated by the US shutdown and the rotation of senior members in the Trump administration – the resignation of US defence secretary Mattis was making headlines at the end of December. Since then, President Trump has made strenuous efforts to project a more settled demeanour, and a major escalation of the shutdown was avoided.

While concern over the political mood in Washington still has the potential to knock investor confidence, ultimately economics drives markets. Following market turbulence at the end of the year, and with an eye on the potential impact for the US consumer – and voter – the US administration will focus on avoiding a recession and keeping the economy growing in the lead-up to the president’s re-election campaign in 2020.

Looking ahead – where next for markets?

Overall, the environment for risk assets now looks fairly balanced. The economic slowdown that our in-house indicators identified last year is still ongoing, but on the other hand central banks are now more dovish than anyone could have predicted two months ago. And given the current outlook for low inflation, there’s no reason for central banks to change this stance anytime soon, which is positive for financial markets.

We are looking at the following factors to shape our investment views in the coming months:

The contrarian view

Many investors remain cautious about the economic outlook. In line with our contrarian investment principles, we see this as a signal to maintain confidence in risk assets.

Own quality

We continue to think that it makes sense to own quality assets. Quality remains a top criterion, be it in our direct equity investments or in our fund investments.

Strike a balance

This environment calls for an overall balanced positioning of our portfolios. Risk assets – mostly equity and selective credit assets – currently account for a little over half a typical balanced portfolio – with the other half invested in government bonds, high grade credit and alternatives to provide some diversification. We also hold a cash reserve for when we want to act quickly on new investment opportunities.

Stay alert

Over the coming quarter, we will be on the lookout for anything that could shift focus from short-term political spats to economic fundamentals. While Brexit and its influence on UK assets remain unresolved, global investors will be looking for confirmation that the global economy is stabilising or bouncing back.

Our analysis will as ever be focussed on identifying the underlying structural investment themes that often tend to be pushed to the background by alarming news headlines. Our in-house indicators will help us navigate any choppy waters and keep the focus on the main drivers of the global economy.

Important information

When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.