Political noise remained elevated throughout the second quarter. The increase in trade tensions over the last month has become the key focus for markets. The US administration has implemented several new protectionist measures and is intent on imposing even broader ones in the near-term.
USA
Starting on a global scale, after temporary exemptions, the US government introduced substantial steel and aluminum tariffs across the board. Most affected regions are Canada, Europe (mainly Germany and The Netherlands), Russia, South Korea, China and Mexico.
Furthermore, the Trump administration has introduced additional tariffs on Chinese goods and threatened to extend import tariffs on European cars, additionally increasing trade tensions. China and the euro zone responded with retaliation measures. On the G7 summit in Quebec, the US found itself isolated on the topics of trade politics, Iran sanctions, and environmental protection issues.
Europe
In Europe, Italian politics truly rattled markets across all asset classes, from the euro-currency over bonds all the way to equities. European banks have been one of the key victims of contagion in the equity space, substantially underperforming the overall market during this short, but intense period of elevated uncertainty.
UK
The UK, on the other hand, is deeply divided over the Brexit thematic, so that negotiations with the EU have stalled and the Brexit may be postponed into 2019.
Central Banks
On the monetary policy front, the US Federal Reserve raised its key rates for a second time this year in June, pointing to four possible hikes in 2018.
The European Central Bank, on the other hand, announced to end its bond-buying program by year-end while leaving interest rates unchanged until at least summer 2019. With these announcements, we have likely reached "peak liquidity" and monetary policy turns from a clear tailwind for risky assets to a more neutral force
Healthy fundamentals should outweigh "noise"
As far as fundamental developments of the corporate world are concerned, there has been far less noise. While the global growth acceleration has somewhat abated, overall growth levels remain in a comfort zone while global earnings growth continues to look solid.
We maintain our overweight on the equity asset class with preference for European equities.
For Europe, we continue to see further upside potential in operating margins and ongoing healthy earnings growth. Ongoing earnings growth combined with lower equity prices lead to the lowest P/E valuation multiples in more than two years.
Conclusion
In my opinion, the equity markets are gathering enough energy, and momentum, to permit a dash to new all-time highs and then keep right on pushing higher. Interestingly, almost NOBODY is expecting this to occur. Most continue to look for a decline, or at best a range-bound stock market.
I do not believe it, but must admit I was surprised by the additional tariff news and the concurrent stock market one-session “heart attack,” which interrupted the upside rhythm of the market I had expected.
This article was issued by Kristian Camenzuli, investment manager 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.