Market Insights – January 29th, 2019

Our experts share their market views with you.

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A cowboy on horseback observes the golden mountains


The eurozone’s PMI is down, sug-gesting that the region has had a wobbly start to the year. There are two reasons for this: business con-fidence has sunk in France, most likely because of the ‘gilets jaunes’ protests, and Germany’s car sector remains in the doldrums. These are both short-term factors, and activity could pick up later in the year.

The longest-ever US government shutdown has come to an end after 35 days. A special committee now has three weeks to negotiate a se-curity plan for the country’s south-ern border. The financial markets should welcome the end of the deadlock between President Trump and the Democrats.

After consolidating briefly, gold has regained the momentum observed in the fourth quarter and hit USD 1,300 per ounce, supported by inflows into gold index ETFs.

Rate hikes will have to wait

The macro cycle is ageing, especially in countries like the USA that saw their economies pick up more quickly after the 2008 financial crisis. Yet the benchmark rates of most major central banks are still at rock bottom, with the notable exception of the USA. 2018 was meant to be the year of monetary-policy normal-isation, with the US Federal Reserve leading the way. But with the global economy slowing and inflation remaining low, it looks like things won’t return to normal until after 2019. That’s because inflation could slip further downwards. Wages are picking up in industrialised countries, and especially in the USA, where hourly earnings rose by more than 3% over the last 12 months. They are also on the rise in Europe, albeit at a more sluggish pace. But wages are having less of an impact on prices now, in an increasingly digitised world, than they did in the past. Competition, partic-ularly from online shopping, is keeping a lid on the prices of goods and services. And the recent slump in energy prices will push inflation figures down further. Even under the best circumstances, inflation has struggled to reach the tar-get of 2% set by major central banks. It seems that the Fed has already decided to take a break in its tightening, which could prompt other central banks around the world to freeze their monetary policy as well. The European Central Bank, which has only just brought its asset purchase programme to an end, is look-ing for new ways to shore up the econo-my in the event that economic activity or inflation slow too quickly. Interest rates look set to remain extremely low in the eurozone and Japan, limiting government bonds’ upside. This is also the case for Switzerland, where investors have come to terms with the idea that yields on Swiss government bonds are likely to remain in negative territory for some time. After a sharp rise in risk premiums on lower-quality bonds, this segment of the market offers the best prospects. This is especially true of US corporates, as well as emerging-market debt denominated in both local currencies and strong currencies.

Japan – times are changing

The Tokyo Stock Exchange’s downward slide in the final quarter of 2018 left multiples below 12x 2019 forward earnings, bringing valuations down to levels not seen on the Topix since the most recent recession. But Japan’s economic climate and growth prospects remain robust for the next few years, with GDP still forecast to grow by 0.9% in 2019.

The VAT hike scheduled for October could be risky. Even though the outlook for the global economy is more uncertain, we think the government will go ahead with this increase. It may, however, also bring in additional fiscal measures and further exemptions in order to prevent adverse knock-on effects like those experienced when the consumption tax was last raised in 2014.

Another risk is the yen’s appreciation, which has started to rattle some inves-tors. A strong yen could damage corporate profitability overall, but not all companies will be affected equally. Manufacturers of cars and electronic components will be hit hardest, while the retail sector may even be boosted by the yen’s rise.

From a longer-term perspective, steady growth in household income, coupled with a more open immigration policy and better redistribution among shareholders, could bring foreign investors back to the Japanese market after a glaring ab-sence and further fund outflows in recent months.


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