What led to such a strong performance in equities?
The spectacular stock market rally in the first half of 2019 has made up for the losses suffered by investors in 2018. This classic V-shaped recovery for the equity markets was a mirror image of the price trajectory in Q4 2018. Two decisive factors brought about the turnaround. Firstly, the US Federal Reserve made a U-turn in its interest rate policy, calming the fragile nerves of market players in the process. Secondly, there were signs of rhetorical rapprochement in the trade conflict between the US and China. These upbeat signals again raised hopes of a positive outlook for the global economy.
Are you concerned that the S&P 500 is now trading at an all-time high?
It is true that the S&P 500 is trading at an all-time high pushing the historic price-to-earnings ratio to 20x. However, it is also true that only 50 per cent of the S&P 500 is overvalued at this point in time and not all sectors within the index.
At these levels the S&P 500 is trading on a forward price-to-earnings ratio of 16x which is below its 10-year average of 18x. This means the rally could have legs from the current levels on the back of positive news in the markets.
Do you think a trade deal will happen?
Yes, because we expect President Donald Trump to want to avoid a recession and have a strong stock market going into the presidential election next year. If there was one, it would be called the ‘Trump recession’ since it would be largely caused by the restrictive trade policies of the Trump authority.
Are you worried the US will enter into a recession soon?
At a time when many are voicing fears about a looming recession, we think the US economy is stronger than most people make it out to be. The US is a @Goldilocks’ economy – not too hot and not too cold. The closely watched Atlanta Fed’s latest reading on second-quarter GDP came in at 1.9 per cent. That would be down from the first quarter reading of 3.1 per cent for an average of about 2.5 per cent in the first half. Still, corporate earnings are better than expected.
Are you concerned about the mediocre growth in Europe?
We are of the opinion that things will start to improve in Europe once we get a trade deal. Europe has suffered most from the trade conflict. The eurozone is heavily dependent on global trade. It is, therefore, not surprising that a sharp decline in economic output has been observed and that leading indicators are improving only slowly.
Will you invest in gold?
The key elements of the previous multi-year bull-run in gold included producer buybacks, the introduction of gold ETFs, strong growth in China’s gold demand, central bank buying and a broadening base of investors. The current bull phase features central bank buying and investor interest, but not the other supports of previous episodes of strength.
If global economic growth is much weaker than we expect, and the Fed has to cut towards the zero lower bound, investor interest is likely to broaden further and take gold much higher.
What are your views on oil?
The US oil price recovered significantly in the first half of 2019 following its collapse at the end of 2018. We expect short-term fluctuations induced by demand and supply-side factors. On the demand side, the trade conflicts between the US and China will play a major role and could lead to inhibited market expectations regarding oil demand in the short term. On the supply side, declines in production in Venezuela, Libya and Iran could lead to short-term market uncertainty.
What is your outlook on stocks for the second half of the year?
The macroeconomic environment and corporate data continue to support an investment in equities. However, various tweets from the US President have moved this asset class more in recent months than fundamental changes. This phenomenon is likely to remain the driving force ahead of China’s loose monetary policy and stimulus measures.
Patience and stock selection will also be decisive. As in the first half of the year, selection will be more important than allocation also in the second half of 2019. The focus will remain on quality stocks that boast a solid balance sheet and stable cash flows even in difficult economic cycles.
Can you mention some stocks you are interested in?
In Europe we like Danone and L’Oreal because of their focus on benefitting from the increasing middle class in China. We also like Airbus because of its strong order book and because it is benefitting from the problems Boeing is facing at the moment.
We like ASML, LVMH and Kering because they are well positioned to benefit from any improvement in the trade war negotiations. We also like Axa and Allianz in the insurance sector, which offer attractive dividends in a low interest rate environment.
In the US we like Amazon and Microsoft because of their exposure to the cloud business. We also like Mastercard for its potential to continue increasing its profitability and Alibaba because it is well positioned to benefit from any positive outcome in the trade war negotiations.
What is your advice to investors?
We are of the view that patience, coupled with discipline, will pay off in the next few months. It is still possible to continue to profit from the equity markets. If volatility is low, selective gains should be realised and the cash allocation increased in order to be able to take advantage for when volatility increases and opportunities arise.
Kristian Camenzuli is investment manager at Calamatta Cuschieri. The information, views and opinions provided in this article are solely for educational and informational purposes and should not be construed as investment, tax or legal advice. This article was issued by Calamatta Cuschieri Investment Services.