Investors are starting to show optimism as signs of 'baby Goldilocks environment' manifest
Defensiveness has been the predominant attitude among investors in 2019, but that appears to be falling away as increasing flows into beaten-up assets reflect an improving outlook for the global economy.
“The British pound is up more than 6% from recent multiyear lows, while a rebound in China’s yuan has lifted a broad range of currencies,” reported the Wall Street Journal. “Emerging-market equities have also bounced back … and a rise in oil is leading a rally in commodities that has buoyed everything from copper to coffee.”
Issues that have burdened markets for most of the year have settled into better-than-expected outcomes. Those include an initial U.S.-China accord on trade; interest-rate reductions by the world’s largest central banks, which could curb a manufacturing slowdown; and the declining probability of a disorderly U.K. departure from the European Union.
“There are some early indications that the worst may be behind us and the global economy is finding a floor,” said Fiera Capital portfolio manager Candice Bangsund, who has been encouraged by a three-month bounceback in the J.P. Morgan Global Manufacturing Purchasing Managers’ Index along with more-productive trade negotiations.
Such developments, she wagers, will be particularly beneficial to mining- and energy-heavy Canadian stocks. The world’s two largest economies’ agreement to take initial steps toward a trade deal last month have been followed by a rise of about 7% for both emerging-market stocks and oil, followed closely by European shares.
“Oil and stock benchmarks for the U.S., Europe and emerging markets are on pace to all climb at least 10% in the same year for the first time since 2009,” the Journal noted.
This week, investors will be keeping eyes and ears open for reports on October inflation, retail sales, and industrial production figures in the U.S. as early indicators of last-quarter economic performance.
There has also been a lockstep advance across currencies that are sensitive to global growth and trade, including the South Korean won and the Australian dollar. That has come amid stable economic growth, low inflation, and favourable interest rates that add up to something akin to a “baby Goldilocks environment,” according to Olivier Marciot, senior vice president and investment manager at Unigestion.
“We think it’s time to deploy money into markets broadly,” said Marciot, who has been raising stakes in EM assets while betting against U.S. equity volatility and trimming credit-market positions.
Within the U.S. stock markets, some are turning to cyclical sectors that have become cheaper than technology and other fast-growing sectors. The industrial and financial sectors, the Journal reported, have been the best-performing segments of the S&P 500 in the past month.
Trends in safe assets, meanwhile, appear to also be reversing. Aside from a drop in gold and the Japanese yen, investors have seen the 10-year U.S. Treasury note pare some of the decline that brought it to near-record lows earlier this year. Yields on certain long-term European government bonds have crept out of negative territory for the first time in months.
Aside from advancing their allocations in riskier sectors, some investors are exploring alternatives to U.S. stocks, which have grown more expensive relative to corporate profits after years of outpacing global markets.
