View more on these topics

Karen Ward: Has the outlook for equities changed?

The US stock market hit its latest record in January but fears remain as low interest rates persist

In the early weeks of this year, markets climbed a mountain of optimism, fuelled by a faith in synchronised global growth and ongoing loose global monetary conditions. Three weeks into 2018, the S&P 500 had raced up 7 per cent, MSCI Europe was 3 per cent stronger, and Japan’s Topix had advanced 3 per cent.

Confidence has since eroded. Fears that growth surge may now be stalling globally are undermining the sunny premise that had powered markets higher.

If the Federal Reserve looked set to normalise rates gradually alongside a global economy that was still picking up steam, then the earnings outlook would dominate, bolstering equity prices. But the cracks in the growth story that have damaged confidence in recent months make it more difficult for investors to shrug off the US central bank pushing the discount rate higher.

These cracks are mostly evident in Europe. After a phenomenal – if long-awaited – recovery in activity last year, the business surveys hit a bit of a rut in March. That left investors wondering if this weaker economic data was a blip or the sign of a peak.

Special report: A new dawn for UK equities?

Adverse weather might be contributing to the underwhelming figures. The “Beast from the East” did not only bring the UK to a standstill in March, but the cold snap affected business as far south as Spain.

The most likely explanation for the downturn in sentiment on the continent was the combination of a euro-dollar exchange rate travelling rapidly through $1.26 (with all the surrounding chatter of a move to $1.30), and investors fretting over a looming trade war. Prospects were hardly looking up for the eurozone’s exporters – which are responsible for a hefty 47 per cent of GDP.

We have seen similar aversion to rapid spikes in the euro in early 2011 and early 2016. In both instances, the business surveys suffered a setback.

But as we move through the coming weeks, exporters may have more grounds for optimism. The euro-dollar rate is now back below $1.20, in part because the European Central Bank has made it abundantly clear that “patience and persistence” is required with its ultra-loose policy.

Trade war fears may also moderate. As the US midterm elections approach, history reminds us that as voters go to the ballot box, an incumbent president could really do with low unemployment and rising stock prices. The stock market has made investors’ verdict on a global trade war clear in recent weeks. It may soon be in Donald Trump’s political interests to dial it down.

Money Marketing’s comprehensive coverage of investment trends

China’s president Xi Jinping has indicated he is willing to discuss China’s intellectual property restrictions, which act as an impediment to foreign business. If the negotiations reduce these barriers to entering the Chinese market, this could be a boon not just for US companies but businesses globally. The end result of this dispute could be more – not less – global trade.

This would lift the sentiment of Europe’s exporters and contribute to the virtuous cycle on the continent of more jobs, happier households, more spending and more optimistic companies willing to employ and invest. On the latest data, eurozone employment growth is running at an annual rate of 1.5 per cent, the exact same rate as the US. That is a firm foundation for ongoing growth in the eurozone in excess of 2 per cent.

A rebound in corporate sentiment in Europe, alongside robust earnings, should revive investors’ confidence that the global economy is on track to record another year of strong growth. Robust global earnings should outweigh a rising discount rate. Remember that while the US 10-year Treasury yield has risen by almost 70 basis points over the past year, expectations of S&P 500 earnings in 2018 have risen from 12 per cent to 20 per cent over the same period.

Given the reaction to rising yields in recent weeks, one is left wondering whether some investors seem to need low interest rates to be convinced to buy equities. But low interest rates were in place to counteract weak growth and low inflation.

The Fed’s glacial but concerted moves to raise rates signal their confidence that the economy no longer needs the crutch of low interest rates. The fact that longer-term rates are also rising suggests that some of the structural concerns – including low productivity and risks of deflation – are also dissipating. This is good news.

Despite the market jitters, the cracks in the global growth story do not look fatal. Indeed, an environment of robust operating leverage, corporate pricing power and more normal interest rates is still a healthy backdrop for holding equities.

Karen Ward is chief market strategist for the UK and Europe, JPMorgan Asset Management



FCA robo review a wake-up call for the industry

An FCA review of automated investment advice has given a wake-up call to robo-advisers to meet the same standards as traditional advisers. Finance & Technology Research Centre director Ian McKenna says the regulator has worked hard with the industry to raise standards and he now hopes it can do the same with robo-advisers. He says: […]

File images of financial data around the earth

400 Cofunds clients locked out of new platform website

Hundreds of Cofunds’ advised clients have been locked out of their accounts after being moved to the new Aegon platform over the first May bank holiday weekend, the provider has confirmed. In a statement, Aegon says there are around 400 advised clients who can’t access their account through the website. However, they can get access by […]

‘Sudden resignation’ by Invesco in fight over fees leaves trust hunting for new manager

The Invesco Perpetual Enhanced Income investment trust is weighing up bids from new managers after Invesco unexpectedly resigned from the mandate over a dispute around fees. The board of Invesco Perpetual Enhanced Income Limited says it has received “a significant number of highly credible proposals” from investment managers wishing to take over the trust. It has narrowed […]


Auto-enrolment arrives but is it a done deal for small firms?

When business secretary Vince Cable told the Liberal Democrat party conference he had defeated the Tory “headbangers” who “find sacking people an aphrodisiac”, there was little doubt who he was thinking of – Adrian Beecroft. The Beecroft report, which was commissioned by the Government and published in October last year, contains a series of radical […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment