Again and again, market is full of surprises and the first three months of 2019 surprised most investors as usual. Global stock markets flipped to hero from antagonist and ended on a high note by end-1Q 2019. The S&P 500 index posted its best quarter since 2009, having jumped 13.1% and leaving the index only 3% off its all-time peak in October last year. Other investments from junk bonds to commodities have also bounced back from their dismal end to 2018. The turn was driven by a dovish shift in rhetoric from major central banks, in particular by the pause in the Fed’s hiking cycle, which may help extend the U.S. economic expansion by some more years. Besides, concern over a trade war eased too, while policy stimulus from China is expected to provide a boost to the Asia-Pacific region. Overall, the recession concerns look overdone last year, and the global cycle conditions are improving at the margin over the last three months.
Let’s see how different assets perform in 1Q 2019 (in US$):
- The S&P 500 index surged by 13.7%
- Nasdaq jumped by 16.8%
- MSCI EAFE index rose by 10.2%
- MSCI Europe index increased by 10.7%
- MSCI EM index up by 9.9%
- Shanghai Shenzhen CSI 300 index escalated by 31.8%
- MSCI Asia Pacific index rose by 10.8%
- Bloomberg Barclays Capital Aggregate Bond Index up by 2.94%
- S&P U.S. Treasury Bond 10-Year Index up by 3.13%
- JP Morgan Emerging Markets Bond Index EMBI Global Core USD up by 9.28%
- Barclays US Corporate High Yield Total Return Index up by 7.26%
- Gold up by 0.7%
- Crude Oil WTI up by 32.4%
- Copper gained 11.1%
Figure 1. Global Performance Across Assets – Total Return (US$)
Source: Bloomberg, Noble Apex/iFund
Sounds great? Equities, bonds and commodities all have excellent performance in 1Q 2019, which is relatively unusual in particular when we see a positive correlation between equities and bonds at current late stage of the cycle. The occurrence of this is likely due to excessive market pessimism last year, which drove mispricing across different assets, while at the same time this also indicates that investor expectations are very diverse in current market given that today’s cycle has been so different from previous experiences.
However, the positive performance and correlation for bonds and equities are unlikely to last for a long time in our view. The rally since January has already taken the global equities markets back to above long-run average level, which imply low but positive earnings growth (i.e. 3.5% global GDP growth) and therefore, leaving little room for another leg up over the remainder of the year as global growth is less likely to accelerate drastically this or next year. For US equities, with valuation stable and margins flat to slightly down, the upside for it will be more dependent on “sales driven” earnings and dividend growth, which we think is reasonable fair at around 6% earnings growth for the S&P500 in 2019 (vs. 22% in 2018).
On the other hand, the recent fall in bond yields has been mostly driven by real yields coming down on rising growth concerns rather than falling inflation expectation. The decline in long-term rates but not short rate has led to recent inversion of yield curve for the 3-month and 10-year Treasury. Despite an impending recession is far from assured at current stage, we believe the Fed hiking cycles is mostly completed and a rate cut is more likely than a hike in future, which should continue to bode well for US. treasury. We are less positive on US high yield, Germany and Japanese bond as they are relatively expensive with yields well below fair value.
Nevertheless, the first quarter was a good lesson and reminder for us of taking a long-term perspective on investments, while opportunities always emerges after periods of disappointment. Instead of trying to time the market, investing is actually about time in the market systematically. Investors should always to keep his portfolio with an appropriate mix of quality investment so that you can stay invested in different market environments.