INSUBCONTINENT EXCLUSIVE:
By Ksenia GalouchkoInvestors are starting to doubt that Jerome Powell’s magic dust can keep working miracles in equities.
The U.S
Federal Reserve’s remarkably dovish stance got a polite but restrained nod from markets on Wednesday after trade tensions and profit woes
The SP 500 Index fell 0.8 percent over the five days while the Stoxx Europe 600 Index posted the worst week this year as focus shifted to
slowing economic data and President Donald Trump’s decision to keep China tariffs.
Yes, investors are surely grateful to Powell for this
year’s $10 trillion global stock rally
But it’s not in the Fed’s power to reduce geopolitical risks, and for the rally to continue, earnings upgrades are needed ASAP,
according to Karen Ward, chief market strategist for Europe, Middle East and Africa at JPMorgan Asset Management
Analyst downgrades of global profit growth have outpaced upgrades since August, showing no signs of stopping.
Valuations aren’t helping,
On a forward price-to-earnings basis, both the SP 500 and MSCI World Index now trade near the levels they were at during the height of last
Back in December, they bottomed out near the lowest multiples since 2013.
“The valuation story in stocks that we saw at the start of the
year is no longer compelling,” Ward said
“It’s very helpful if Powell pauses interest rates from here but there’s nothing he can do to determine whether the trade hostility
eases or continues, and really it’s that that’s depressing global growth.”
Traders are starting to vote with their feet
After a short-term inflow into equities earlier this month, stock funds across all the major regions saw $21 billion exit in the week
Many investors have remained on the sidelines of this year’s rally after being burned at the end of 2018 and have turned to bonds in
search of yield and defensive positions.
Bank of America Merrill Lynch strategists including Michael Hartnett went so far this week as to
say that the gains in stocks have been driven “solely” by corporate buybacks, call options, short-covering and purchases of single
stocks by retail investors -- and not by general investor appetite for equity risk.
And major asset managers are starting to reduce their
Joh Berenberg Gossler Company KG scaled back its stock positions closer to neutral in recent weeks and UBS Global Wealth Management in
March took profit on the global equity overweight amid concerns about economic growth.
To be sure, as we approach the end of a quarter
that’s set to be the SP 500’s best since 2009, sentiment is becoming more cautious but is nowhere close to the gloomy mood seen at the
end of last year.
At Wells Fargo Asset Management, Brian Jacobsen, a senior investment strategist, said that although his multi-asset team
has recently reduced its equity position from overweight to neutral, in the longer run the dovish monetary environment remains supportive of
stocks.
“The run-up to first-quarter earnings season could likely be a little rough going, but the weakness will likely be temporary,”
“We’re still off the previous highs, but investors can ignore the Fed’s downward revisions to growth because the Fed has finally
stopped ignoring the slowdown.”
HSBC Private Bank and State Street Global Advisors remain bullish on global equities but that doesn’t
mean they recommend indiscriminate buying
State Street’s head of investment strategy and research for EMEA, Altaf Kassam, said that he’s hopeful the rally has legs as U.S
unemployment is near historic lows and there is optimism over a U.S.-China trade deal
Still, the company has been selling U.S
small-cap shares on the deterioration of the global growth outlook and acquiring emerging-market stocks.
Ultimately the gains could end if
the tariff war fails to be resolved
The trade deal with China is “ getting very close” but this “doesn’t mean we get there,” Trump said on Friday.
Setbacks on the
political front “cannot be ruled out and valuations of risky assets are no longer cheap,” said Sylvie Golay Markovich, head of financial
markets strategy at Credit Suisse Group AG
“We thus consider it prudent to remain neutral for now.”
