Fisher Investments UK

Fisher Investments UK’s Markets Commentary Summary: 2019 Summer

Spring has sprung, and so have global equity markets. Up 15.3% since Christmas’s low and 9.9% in Q1, global equity markets have enjoyed the V-shaped recovery we expected in December.[1] We think this should be only the beginning of a great year for global markets.

A great 2019 doesn’t preclude volatility or another correction (sharp, sentiment-driven drop of roughly -10% to -20%). One is always possible, for any or no reason. Attempting to time such short-term volatility is a folly, in our view. We think now is the time to consider whether your retirement investments are aligned with your goals, time horizon and comfort level with volatility. Our experience indicates having a solid plan in place and good counsel can help you navigate a correction, if one comes.

That said, we forecast equities to keep climbing in 2019, though we suspect the pace will likely slow some in the year’s second half. This is the third year of US President Trump’s term—typically far stronger and more consistently positive for US equities than years one and two.[2] Since US and developed-world equities outside America are tightly correlated—meaning they move in the same direction much more often than not—we see this as bullish for the world.[3] The presidential cycle’s third year is also usually front-end loaded, meaning returns have generally been strongest in the year’s first half.[4] We think the early boom comes as markets celebrate reduced legislative risk after the prior November’s “midterm” legislative elections. This becomes more widely known later in the year, whilst political uncertainty starts drifting higher as campaigning for the following year’s elections heats up. Equities should still do well, in our view, but likely with more swings than in the recent past.

Whilst it seems premature to us to assess 2020 market drivers, market data show US election years are usually good for equities, too.[5] Unlike third years, though, fourth years tend to be back-end loaded—most of the returns come late in the year.[6] Election uncertainty seemingly weighs early. But as party primaries gradually thin the herd of candidates to a two-nominee horse race, equity returns typically improve—apparently cheering falling uncertainty.

In our view, economic fundamentals globally are far better than appreciated. Yes, throughout financial media, we noticed pundits going bananas over weak manufacturing surveys and the US yield curve’s tiny inversion in late March (meaning, US short-term interest rates briefly exceeded US long-term interest rates). We think this is bullish. In our view, media attention saps negative surprise power. We saw headlines sweating potential inversion months before it occurred. To say it isn’t priced in—already reflected in securities pricing—strikes us as arguing markets aren’t efficient. Rather than being dangerous, we think the inverted yield curve sets expectations low, extending the proverbial “wall of worry” bull markets are often said to climb. To us, the real time to worry about an inverted yield curve is when no one else does, raising the risk of negative surprise.

Then too, we think what really matters is the global yield curve—a composite of all 23 developed world nations’ yield curves, with each weighted according to the country’s share of global gross domestic product (GDP, a government-produced estimate of national economic output). Hypothetically, based on interest rates globally, a big multinational bank today can borrow for next to nothing in most of Europe and Japan, hedge for currency risk and lend profitably in the US.[7] Globalisation and banks’ ability to capitalise on varying worldwide interest rates likely render any one country’s yield curve largely meaningless—even a country as big as America. Plus, the difference between a slightly inverted US curve and the preceding months’ slightly positive curve is a distinction without meaning, in our view. Despite the recently flat curve, US loan growth continued.[8] Further, as the yield curve’s return to positive territory on 29 March shows, shallow inversions can reverse fast.[9]

We think widespread manufacturing gloom is similarly bullish. The chatter dwells on surveys called purchasing managers’ indexes (PMIs), which loosely measure the percentage of businesses growing in a given country. They showed eurozone manufacturing contraction in March, with Germany especially weak.[10] Yet manufacturing is just 25% of eurozone GDP and 23.1% of German.[11] Services is worlds bigger—73.0% in the eurozone and 68.2% in Germany—and services PMIs are nicely positive everywhere but the UK, where Brexit uncertainty continues discouraging risk-taking.[12] Meanwhile, most evidence suggests eurozone manufacturing’s woes should soon fade. For one, EU auto emissions rules’ impact, which weighed on auto production in recent months, looks to be waning. Additionally, Chinese stimulus taking effect should boost private sector demand for European exports. Other indicators also point positively, including US and eurozone Leading Economic Indexes—high and rising, inconsistent with a looming recession.[13] Even UK data, in our view, don’t signal recession immediately ahead. The services PMI has blipped negative before during this expansion, without triggering the bull market’s end.[14] Whilst recent delays and political theatrics unhelpfully prolong uncertainty, we think this should fall whenever Brexit finally happens, helping unleash pent-up demand.

This now 10-year-old bull market has plenty of fuel, in our view. Bull markets generally don’t die of old age. In our view, they die when they finish climbing the wall of worry and euphoric investors ignore weakness—or when some huge unseen wallop knocks trillions off global GDP. Euphoria appears absent today. Instead, a surprising amount of scepticism persists despite global equity markets being just -3.5% below all-time highs—December’s volatility weighs on sentiment.[15] Financial media appear to overemphasise tiny negatives and ignore good news. Pundits warn of alleged wallops in China, Brexit and tariffs, not fathoming that all are likely too small, misunderstood or unlikely to unfold disastrously. All seem widely watched, too, limiting surprise. Rather than looming disasters, we think they represent opportunities—places uncertainty stands to fall. Brexit uncertainty could be over by the time you read this, or it could fall a year or two from now. We think it is a matter of when, not if.

We will discuss these topics and more in greater detail in the full Markets Commentary. For more information on our services and outlook, please contact us at 0800 144 4731.

- Fisher Investments’ Investment Policy Committee

Aaron Anderson, Ken Fisher, Michael Hanson, Bill Glaser and Jeff Silk

This information is based on figures denominated in pounds unless otherwise noted. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: 2nd Floor, 6-10 Whitfield Street, London, W1T 2RE, United Kingdom.

This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein.

Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.

[1] Source: FactSet, as of 3/4/2019. MSCI World Index returns with net dividends, 25/12/2018 – 31/3/2019 and 31/12/2018 – 31/3/2019.

[2] Source: Global Financial Data, as of 12/3/2019. Statement based on S&P 500 Index annual total returns in USD, 1925 – 2018. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.

[3] Source: FactSet, as of 31/3/2019. Statement based on the correlation coefficient between the S&P 500 and MSCI Europe Indexes, 9/3/2009 – 31/12/2018. The correlation coefficient is a statistical measure of the relationship between two variables.

[4] See Note 2.

[5] See Note 2.

[6] See Note 2.

[7] Source: FactSet, as of 31/3/2019. Statement based on overnight interest rates in the eurozone, Sweden and Japan and 10-year US Treasury yields.

[8] Source: US Federal Reserve, as of 31/3/2019.

[9] Source: FactSet, as of 1/4/2019. US 10-year Treasury yield minus 3-month Treasury yield on 29/3/2019.

[10] Source: IHS Markit, as of 5/4/2019.

[11] Source: Eurostat and DeStatis, as of 26/3/2019.

[12] Ibid.

[13] Source: The Conference Board, as of 31/3/2019.

[14] See note 10.

[15] Source: FactSet, as of 3/4/2019. MSCI World Index return with net dividends, 28/8/2018 – 31/3/2019.

Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.