Recession fears have dropped significantly since December, pushing equity markets higher as Central Banks have adopted a more accommodative stance. Market sentiment currently seems to be particularly driven by the generally dovish language, rather than a broader acknowledgement of relatively strong fundamentals (especially in the US).
Therefore, if market sentiment is a function of rate path expectations, one could argue that we may be close to an end. Recent recessions were always preceded by the policy rate exceeding the target rate (neutral rate), so the general desire to avoid this situation from happening again is large and clear. This said, the level of the neutral rate is uncertain. To highlight this, it is worth recalling that as of 19th December 2018 every FOMC participant thought that the neutral rate was higher than today’s policy rate. Thus, in order to be at the end of the rate path, FOMC participants must revise their “dot plot” downward during the next meeting on 20th March.
Powell’s language has been indicative of the direction of “the dots”, but should these projections point to just 1 rate hike in 2019, equity markets will most certainly experience another bout of increased volatility in the Investment Adviser’s opinion. On the other hand, if the “dot plot” adjusts according to market expectations (no hikes) then the market could react positively, leading markets higher.
The Fund continued its progressive shift to lower equity exposure (ca. 62%), whilst increasing its fixed income exposure (ca. 34%). In terms of the Fund’s equity contributors by sector, Information Technology was the largest monthly contributor followed by Consumer Staples, and Industrials. At a stock-level, Keyence was the largest monthly contributor, followed by A.O. Smith, and Alibaba. At the other side of the spectrum, Wirecard was the largest detractor followed by Centene and Booking Holdings. The Fund exited Wirecard completely during the month.
Against the backdrop of the above described market development, the Investment Adviser believes that 1 rate hike is not entirely out of question. This should however not keep the economy from finding its way back to a healthy 2%+ growth rate, mild inflation and full employment. Thus, in terms of strategy, the team expect to see a gradual yet tame slowdown in economic growth going forward. In the US, the benefits of the prior year tax cuts and consequential capital spending impulse are now fading.
Going forward, there appears to be some room for selective margin expansion, although the current labour tailwind (on the demand side) will eventually turn into a headwind via wage pressures. In the current environment, following a strong rally in risk assets, the Investment Adviser has decided to adopt a slightly more defensive allocation by reducing exposure to equities and increasing its exposure to U.S. treasuries with a medium duration of close to 5.
The views and statements contained herein are those of the Eric Sturdza Group in their capacity as Investment Advisers to the Funds as of 20/03/2019 and are based on internal research and modelling.