Over the week, corporate earnings and European weaknesses were the main topics of discussion, as an improvement in Chinese GDP was shrugged off by investors. A risk off tone appears to be spreading within markets as we approach the Easter holiday, on the back of more mixed corporate earnings data and weaker European PMIs. Trading volumes remained low over the week, as main market participants continue to watch equity markets from the side-lines given an uncertain economic backdrop.
Equity markets gained over the week on very low trade volumes, as volumes neared their lowest levels of the year. Monday marked the lowest full-day of total trading volume in the New York Stock Exchange, lower than the holiday-shortened Christmas Eve trading session. The lack of trading activity reflects a lack of participation in the market by traditional participants as we await clarity on market direction, with key economists continuing to question the durability of the recent equity market rally. As European data continued to disappoint and earnings remained mixed over the week, the UK market gain can be attributed to tax effects following the end of the tax year earlier in the month.
For more information on the Chinese GDP data and what this means for our expectations going forward, please see the attached briefing update
As corporate earnings season gains momentum, it appears increasingly likely that the S&P 500 earnings will post their first decline in almost three years. As weaker global growth and reducing US economic momentum over the first quarter of the year weighs on corporate revenues, higher input costs and lower productivity is expected to squeeze corporate earnings. According to Factset data, analysts are now forecasting a 4.3% decline in earnings in Q1. Following a strong 2018, an earnings recession could be on the cards, with investors watching closely for performance and forward guidance. Given current high valuations, an earnings recession could provide as a catalyst for a sharp selloff in equity markets.
Over the week, a number of key US corporations reported their financials for the first quarter of the year. Results were relatively mixed over the week, with guidance for key financial companies being impacted by the Fed’s dovish tilt, which threatens to reduce banks’ profit-making ability, causing concern for big names such as Bank of America, Wells Fargo and BNY Mellon. As the week went on, key tech stocks IBM and Netflix reported, with Netflix issuing strong quarter results, but weaker than expected Q2 guidance, and with IBM reporting a decline in revenue. So far this year, FX and wages have been cited as the top negative impacts on profitability. Going into next week, we continue to monitor earnings releases closely, with 49 S&P 500 companies reporting for the first quarter.
The Eurozone economy continues to show signs of weakness, as the recent downturn in manufacturing activity extended into lower services PMI for April. Services PMI declined to 52.5 in April, highlighting the weakest expansion in the services sector in three months, with new business growth easing and backlogs of work declining. For the third straight month, the PMI for the manufacturing sector pointed to a decline in activity. Germany is fast emerging as one of Europe’s worst performing economy, with the German government now predicting 2019 will be the weakest expansion in six years. The economy ministry cut its growth estimate to 0.5%, half the pace previously forecast, and significantly lower than the 2.1% projection a year ago. This presents a significant risk to the Eurozone economy, as the German economy has been regarded as the Eurozone powerhouse economy in previous years. The revised forecast comes as the manufacturing industry remains in a deep slump.
With more companies reporting earnings over the coming week, corporate earnings are set to remain in the spotlight, with continued weakness in Europe only confirming our expectations for Eurozone performance over 2019. As explained in this week’s briefing note, the recent Chinese Q1 GDP data has not changed our expectations, and we remain confident in our current positioning as we await greater clarity from the all-important corporate earnings data.
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.
Model Portfolios & Indices
Following the defensive repositioning of portfolios in December, our OBI portfolios have a low equity allocation, with exposure predominantly coming from the FTSE 100 and S&P 500 shorts as well as the Odey Long/Short European fund. For this reason, the equity exposure within portfolios is inversely correlated to markets ahead of the expected decline this half.
Global indices remained relatively subdued over the week as a result of a lack of direction in markets, with Asian stocks failing to gain much on the back of more positive Chinese GDP data. Following a challenging week, the OBI portfolios remained relatively flat as a result of their defensive, well-diversified positioning. Although it is not good in the short term YTD, we have to remember we are in capital preservation mode for a reason. The strong YTD gains are not built on any solid foundation, and we expect them to reverse as fast as they have been realised either in full, in part or even greater depending on what happens in the coming month.
Overall, we know missing out on the gains in comparison to the benchmark is painful, however we continue to see significant risks ahead in equity markets, with investor sentiment tilting towards the downside and risk off sentiment spreading as risks intensify. The economic data continues to support our expectation for a drop back in markets in H1, (in the coming few months) therefore we regard benchmark movements as irrelevant in the short term in the bigger picture and remain defensively positioned going forward.
It takes time for the data to feed through structurally, therefore as we wait for the data to feed through into markets, we are expecting volatile market conditions to continue, however it is key to bear in mind that the scenario will take time to play out. We must view intra week market fluctuations in the context of longer-term market trends and stay content in the knowledge that portfolios are protected from the excessive risks in markets.
As the US earnings season gets going, we will soon know what is happening under the bonnet of the US economy. We will also see the first print of US GDP on the 26th April which will be another powerful indicator as to where we sit with the markets and whether we are seeing an earnings recession, full recession or a slowdown that has already bottomed out or has further to go. Either way we are in precarious times and they are very difficult to manage, and the risks are still skewed significantly to the downside. We are still watching data to ensure we stop being defensive when we are confident that the economic situation and data has stabilised. Markets do not only move in one direction and are today expensive on any measure and will therefore we remain confident that they will fall once reality sets in.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested.
Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1968, London Bridge was sold for £1m to American oil tycoon Robert McCullough. He decided to knock it down, brick by brick, and have it re-built at Lake Havasu in the United States. It was then replaced by the larger, more stable bridge which we see today.
Markets are closed on Friday and Monday for Easter, therefore the next Market Commentary will be on the 1st May.
Have a great Easter! VBW
Gina & Jason