Investment Strategy - January 2020

According to Gilles Moëc, Chief Economist at AXA IM: “Markets clearly want to believe in a robust recovery, and to some extent we agree the skies have cleared. Still, we would love to see actual data match this rebound in sentiment. We continue to think it is not going to be easy for global growth to exceed potential this year, even if some signs of improvement are appearing. China – as often – will be pivotal.”

The world economy is breathing better but it is still not ready for a sprint.

In China, dealing with the financial imbalances and a reacceleration of the reforms – although obviously a positive in the medium run – will cap the re-acceleration this year.

In the developed world, consumption is doing well but we remain concerned by the poor investment dynamics.

“Global dataflow has not changed much over the last few months. In most regions manufacturing continues to struggle – even if it has probably stopped deteriorating – while services remain resilient, supported by a robust labour market."

“The dominant view is that the good news on trade war, coupled with the lagged effect of the monetary stimulus provided last year, will quickly trigger a turnaround of global trade and thus of manufacturing activity. The very latest data from China is encouraging from this point of view. GDP growth has stabilised at 6% in Q3 and Q4, and manufacturing surveys have rebounded in the last two months. In the medium run this is good news for the world economy – slower but higher quality growth in second largest market of the world would be a net positive – but the transition may be a bit painful."

“In the US, there is no reason to stop trusting in the consumer’s capacity to keep economic growth decent. In the UK, the Bank of England (BoE) seems to take the recent signs of slowdown seriously and we now expect the Monetary Policy Committee (MPC) to opt for a pre-emptive rate cut at the end of the month. In the Euro area, Germany remains the point of focus. Those who like their glass half-full will focus on second derivatives and the fact that manufacturing is contracting at a slower pace in mid-2019, but if global investment remains constrained, re-accelerating fast will be difficult."

“The world economy is breathing better, but it is not yet ready for a sprint. But markets have sprinted out of the blocks so far new year.in the Short-term performance has been led by the most cyclical assets – Japanese, US and emerging market equities – reflecting the renewed confidence in the global cycle. These have been closely followed by higher yielding debt assets in terms of total return performance, continuing the trend that began back in October. It is very much a risk-on start to 2020 driven by the expectation of some cyclical growth pick-up and that this will be reflected in a resumption of corporate earnings growth. The fact that the hurdle for central banks to raise interest rates is so high at this juncture means that rate risks are not on the investment horizon.

Valuations, however, are to be watched. The renewed growth in developed market central bank balance sheets has its counterpart in liquidity and broad money growth. With risk-free rates at or close to zero, it is unsurprising that the liquidity environment has propelled asset valuations to post-financial crisis highs. All developed equity markets re-rated during 2019 as recession fears got pushed back. However, this was not reflected in stronger earnings expectations. If confidence in earnings does not recover, current equity valuations may come under pressure.”