2018 started off with a bang. By mid-January European equities were up 4.8 percent. That meant that compared to other asset classes equity investors could have closed books and happily boasted a year’s returns.
Obviously some greed kicked in and greatly improving analyst’s eyesight from a perfect 20/20 to an incredible 30/30.
Further upside was justified through ‘goldilocks’ global economic growth potential where every economy seemed to be heading towards a coordinated expansion. ‘Coordinated global expansion’!! The term alone should have lit up warning lights.
Anything that might have deviated from this perfect scenario was being either ignored or explained away. This included interest rates, yield, exchange rates and Donald Trump.
Within a fortnight the equity market was down nearly 10 percent! Negative sentiment continued through March. Volatility in equity markets continued through the month of April as the US announced details of a proposed 25% tariff hike on some imports from China; China reacted by announcing its own plan for similar tariffs.
A solution seemed unlikely as Trump threatened tariffs on additional Chinese exports. Credit was relatively muted as earnings announcements of high yield issuers did not move the market, while the primary market, despite showing some signs of revival, remained tepid.
Meanwhile, missile strikes in Syria continued to add to concerns that the recent global economic recovery was coming under threat.
The worry list for investors already includes the risk of wider conflict in the Middle East, confrontation with Russia, North Korea, trade disputes and Brexit. However, by the third week of April politics become less dominant as economic developments took hold. US data was generally positive; retail sales growth was better than expected, consumer confidence and other leading indicators were still rising and manufacturing readings came out strong in important regions.
On the other hand, European data disappointed with headline inflation being revised down, but still, consumer confidence was up. In its rate-setting meeting, the ECB remained market friendly as Draghi issued no major announcements regarding the end of the QE program or any major shifts in policy.
Elsewhere, in the US, earnings season was in full swing and this is infiltrating in the performance of credit and equity markets over recent sessions. But the investor’s key focus was the FOMC meeting which carried significant importance, particularly following the spike in the US 10-year Treasury to above the 3.00% level and the marked strengthening of the US dollar of late.
Supported by positive earnings results European equities bounced back. April saw the main index bounce back 5.6 percent and this trend continued into May. By the time of writing the European equity market has recovered most of the negative price movements lost in the previous months.
Company earnings was probably a deciding factor as fundamentals continue to take hold of investment decisions over technical factors. Going forward equities will probably continue to outperform, albeit in a volatile environment.
Politics will remain the main risk outlier, however, unless events lead to a persistent hit in company earnings, equity markets should continue to trend upwards and Europe is best placed to gain from the uptrend.
This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is 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.