Investors must stand firm in second half until data goes ‘pear-shaped’, says Stephen Jones, Kames Capital’s CIO.
Investors contemplating selling equities should stay the course until data sours in order to maximise their potential returns, rather than capitulate to the wall of worry which has caught many out, according to Jones.
Kames position is that with no shortage of events to be concerned about, there is the prospect that the second half of 2019 is a repeat of last year when markets retreated sharply from highs amid concerns around global growth rates and geo political angst.
However, Jonessays there are still reasons to be positive at this stage.
“Events this year have reminded that policies matter more than politics. While there is that fear that markets might once again go ‘pear-shaped’ as they did in 2018, a better Chinese economy, driven by sharply easier fiscal and monetary conditions, has, along with the prospect of US rate cuts, allowed risk markets to extend the gains of Q1 even as Sino/US tensions have increased alongside worrying developments involving Iran.
“This allows equity investors to focus on the growth outlook and the support given to corporate earnings; valuation multiples are around long-term averages. Here the prospects seem reasonable.”
Jones says the US economy – currently growing at around a 2% annualised pace – is a positive, as is the brighter outlook for the Eurozone and Japan and a stabilising China.
“In a world of falling bond yields and ultra-low (or negative) cash yields this is enough to give stocks the benefit of the doubt, particularly as anecdotal and positioning data point to equity investors being underweight, or very defensively exposed.
“Discounting the scope for a sharp exogenous shock, such as a sustained attack on Iran, global equity markets can climb their wall of worry.”
Jones therefore expects more gains in the second half until the next recession comes into view, something he says is a matter of ‘when’, not ‘if’.
“Markets will continue to be challenged by apparent game-changers – emboldened by his Mexican success, Trump will turn his attention to Europe using tariffs to achieve his various ends, for example.
“But investors should try to zone out these noises until the hard economic data turns sour and/or policymakers look like making a mistake.”
However, Jones says while equity investors should stay the course, there are exceptions, notably the UK. He says while the the international exposure of the UK stock market should offer investors some protection against the ‘ongoing UK political farce’, there are clear dangers.
“The likelihood of an early UK General Election continues to increase, and the prospect of a Corbyn-led Administration is not discounted. Labour’s leaders are clear, promising a radical overall of Government policy, public/private ownership and UK financial markets,” he says.
“Although the UK economy has surprised most commentators in its strength since the 2016 Referendum and there is the promise of a fiscal dividend should Brexit be smoothly achieved, and while UK equities look cheap, a ‘radical overhaul’ will scare international investors into a rush for the exit. This is not the time to go strongly overweight UK assets – equities, Gilts or Sterling.”
