Mid-year is always a good time to take account of what we have seen, what we know, and what we might expect from financial markets. And, it certainly has been a benign period for all major asset classes globally, bar a short period of volatility during the month of May. Similarly, the Maltese market is also going through a positive momentum. Indeed, the first six months of the year were rewarding to cautiously optimistic investors.
Twitter-driven trade war
Internationally, the year kicked off with positive sentiment towards risk-taking following the market bloodbath of December 2018. The first months of the year were characterised by constructive rhetoric in relation to trade war de-escalation. This led to equity markets rallying in the first quarter of the year in stark contrast to the performance experienced during the last quarter of 2018. Risk and volatility, however, re-emerged in May to the tune of US presidential tweets and counter-threats on new tariffs between China and the US.
President Donald Trump’s decision to raise current tariffs on $200 billion of US imports from China to 25 per cent from 10 per cent and a warning of more tariffs on $325 billion of additional Chinese left its toll on investors’ sentiment. Risky assets were, however, supported back again by accommodative monetary guidance and anticipations of some sort of accord between the main global economic contenders leading to the G-20 summit in June.
Markets still addicted to monetary easing, few care about fiscal support!
An ageing economic cycle in the US, weakness in the European macro picture and virtually non-existent inflationary pressures have put the Federal Reserve in the US and the European Central Bank (ECB) back into clear accommodative stances.
The ECB’s normalisation kick-off date has been postponed by at least a year to mid-2020. Close to €15 trillion worth of bonds globally are trading at negative yields, and this scenario is exacerbating even further the chase for income with very limited possibility of capturing decent spreads in bond markets. ‘High yield’ is now a misnomer given the low spreads being offered on lower quality paper, thus a conservative approach in managing investments in low-quality bonds is vital.
Similarly to bond markets, equities are also benefiting from expectations of lower rates for even longer periods. This higher correlation is symptomatic of markets being driven by systematic factors that have an effect on multiple asset classes rather than on specific segments of the market. This could lead investors to become complacent and start taking speculative decisions based on the hope that someone somewhere stands ready to buy back their assets at an even higher price than what they paid themselves.
Kicking the can on Brexit whilst pro-EU parties hold their ground
As expected, geopolitics continued to play an important role, mostly in the UK and Europe, as the uncertainty surrounding the Brexit saga seems never-ending. Although most of the unknowns are considered as generally priced-in, further uncertainty might reasonably be expected as the October deadline looms. A lot depends on the stance to be adopted by the new British prime minister.
The outcome of the latest run of European elections seems to have calmed down the growing concerns about the potential rise of euro-scepticism, as pro-EU parties generally held their ground, enabling them to drive the bloc’s top posts proposals.
Other factors such as tensions between the US and Iran and instability in Venezuela did not have a predominant impact on global markets and it is difficult to argue that geopolitics was the exclusive driver of the recent trends in the price of gold, oil and other commodities.
Generally a positive sentiment on the Maltese market
In Malta, the first half of the year was also characterised by positive performance in all local asset classes listed on the stock exchange. The strong economic growth continued to trickle down to the operating performance of many listed companies through higher revenues and improving profitability.
This led to a robust profit season, and announcements of special dividends have also supported the local equity market. In addition, across a number of sectors, many local companies are investing internally for future growth, thus supporting expectations of sustainable long-term returns to shareholders. Inevitably, some companies are going through a different path, with de-risking being the major focal point in the banking industry.
In the local corporate bond market, credit quality and sustainable business models remain a key ingredient of long-term returns whilst the sovereign bond market was a clear beneficiary of the accommodative stance extended by the ECB.
In this environment, the interplay between economic data and its implications on monetary and ‘hopefully’ fiscal policy is a key determinant of investment return expectations. The rational investor, however, ought to be conscious of the fact that financial markets are pricing a benign trade and monetary environment, and as such, any new information, or perhaps a simple tweet, could quickly change the dynamics and test the relative calm being enjoyed by market participants.
It is therefore crucial for investors to find a balance between trying to circumvent the most evident risks whilst taking up opportunities without being hooked in the speculative trap.
The writer and the company obtained the information contained in this article from sources they believe to be reliable but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The writer and the company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in the article. They have no obligation to update, modify or amend the article or to otherwise notify a reader thereof in the event that any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate.
Steve Ellul is head at BOV Asset Management Ltd.