“Volatility is set to stay, though it need not mean that equities are always to the downside.”
– Sebastien Galy, Senior Macro Strategist, Nordea Investment Funds SA, Luxembourg, May 21, 2019
Investment Managers Securities Analysts
Bermuda & Cayman
Volatility in financial markets will remain high near term as: 1) Trade tensions look difficult to resolve but we expect a successful outcome to talks; 2) Anticipation of an end to the economic cycle after a ten-year bull market; 3) High levels of confidence that Fed interest rate cuts will support markets, despite still-easy financial conditions. As such, we remain quality-focused in our positioning.
At the same time three factors could propel stocks higher from here: 1) stronger-than expected earnings and an improvement in companies’ earnings guidance; 2) fading of trade-related geopolitical risks; and 3) signs that Chinese policy stimulus is translating into higher consumption and economic activity. Our preferred regions for equity investing remain the US and Emerging Markets (EM).
The US is home to many quality firms — those boasting strong balance sheets and free cash flow. Our preference for EM reflects solid earnings, stimulus in China, improving liquidity, and greater China A-shares inclusion in the MSCI EM Index.
We are skewed defensively in our sector preference with an overweight in Healthcare. In an environment of slowing economic growth and less certain earnings outlooks, the traditional defensive qualities and resilient earnings growth of Healthcare stocks look appealing. The sector outperformed the rest of the market during the volatile Fourth Quarter 2018. Our view is also supported by demographic and innovative trends with valuations that broadly look reasonable compared to historical levels.
We are underweight on Consumer Discretionary. Current multiples, rising labour costs, and an increasingly late cycle environment are all headwinds for a sector that historically produces its best relative returns early in economic cycles.
We also like Tech from a long-term perspective as the sector has strong earnings momentum and disruptive business models underpinned by technological innovation, consolidation, and trends in consumer demand. We stay equal weight in the short-term as valuations continue to move to new post-crisis highs.
We maintain a positive bias for European equity markets. The ECB is likely to cut interest rates in Second Half 2019. Further, the ECB has called for fiscal stimulus as monetary stimulus is not enough to boost inflation and support growth. Populist movements in Europe are also calling for more fiscal policy action. Additionally, the outlook for eurozone banks and industrials has improved, driven in part by expectations of changes to ECB special bank lending policies and China’s stimulus measures.
We see cheap valuations in Japan along with shareholder-friendly corporate behaviour whilst central bank stock buying and political stability make a case for being slightly overweight Japan.
Economic reforms and policy stimulus support our view on EM stocks. Improved consumption and economic activity from Chinese stimulus could help offset any trade-related weakness. We see the greatest opportunities in Emerging Asia.
We are positive on India, which is likely to enter a postelection environment in which monetary policy can ease, given much improved fiscal and external deficits.