Equity markets continued on their upward trend during the month of November, with the recent optimism fuelled by fading concerns about a risk of escalation in the US-China trade dispute and supportive monetary policy.
The US equity markets marched their way to a record high in the recent weeks, with positive monthly returns across all sectors except for energy, real estate and utilities. The best performing sectors for the month of November, were the health care, technology and financials.
The technology retained its top position as the best performing sector since the start of the year. Similarly, European equities also traded higher, with industrials, materials and health care sectors leading the top performers for the month.
The positivity in the equity markets can be attributed to various reasons. The third quarter earnings across both regions, reflected the macro story, with companies lowering forward guidance and highlighting the impact of tariffs on their margins. Despite being the case, in aggregate, companies across both regions reported better than expected earnings results.
Accommodative central banks are also supporting the equity markets. Fed minutes issued last week indicate that following three rate cuts since July, the Fed is not expected to cut interest rates further and that the current monetary policy is likely to “remain appropriate” unless economic conditions changed significantly.
The European monetary policy is also in easing mode, with a rising focus on fiscal spending to stimulate the economy. As room for further monetary easing continues to narrow, ECB’s Christine Lagarde is increasing the pressure for fiscal stimulus, stating that “monetary policy could achieve its goal faster and with fewer side-effects if other policies were supporting growth alongside it”. The month of November also hinted that some economic indicators have moved off record lows. Case in point, in the US, the Markit Manufacturing PMI rose to 52.2, beating expectations of 51.5 and consumer sentiment rose to a four month high, above consensus.
In Europe, for example, Germany factory goods also saw an unexpected increase. Albeit providing relief to equity markets, it is still too early to call a turnaround, and improvement across a wider set of economic data is needed. Investors are also pricing in progress in the ongoing global trade war.
However, albeit the risk of further trade war escalation has somewhat diminished, US and China are still in the process of locking in the “phase one” deal that should remove the US threat of a 15 per cent tariff on approximately $150 billion Chinese imports, imposed on December 15. Just last Tuesday, China’s Ministry of Commerce announced that “both sides discussed resolving core issues”. Despite that a possible turning point may be on the horizon, much could still go wrong.
Disclaimer: This article was issued by Rachel Meilak, CFA equity analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.