Equity markets rose for a fourth consecutive month in April, with most regions delivering healthy positive returns across the board and the S&P reaching a new all-time high.
Year-to-date, the fuel driving risk assets continues to be rising oil, increasingly dovish tones from central banks and an easing of trade tensions between the US and the rest of the world. We have observed the market is very sensitive to the oil price, rightly or wrongly, and the sharp recovery in 2019 has improved sentiment significantly. Likewise, central banks’ cautiousness due to slower global growth and uncertainty around trade has led some market participants to believe we might have ‘goldilocks’ once again: not too hot, not too cold – just right for equities.
Turning to fundamentals, data in April was mixed. On the positive end of the spectrum, China’s manufacturing sector was seen growing slightly after three months of contraction while the services sector reached a 14-month high. China slowing has been a key reason investors have avoided Europe and worried about Germany’s exposure in particular. In April the data showed the manufacturing sector decline ameliorated for the first time in nine-months. This potential change in trend along with a thriving services sector and strong outlook for domestic demand saw German stocks rally nearly 7.0% during April and contributing to the Eurostoxx outperformance of the S&P.
In the US it was a mixed bag of data, however, on balance positive. The ISM reported faster than expected growth in the manufacturing sector while the services sector grew at a slower pace than expected. Turning to the labour market, Non-farm payrolls data bounced in March, showing 196,000 new jobs were added to the economy after a record low of just 33,000 in February. Real-wages declined slightly, supportive for dovish monetary policy, although unemployment remains at record lows. The Federal Reserve last month indeed declared itself as ‘neutral’ on the pathway for policy from here.
Looking at our positioning against this backdrop, we feel the economic cycle has legs for the time-being and we believe turning very cautious, too soon, poses a much greater risk to portfolio returns versus remaining invested in the market. As always with equity markets, it is not about the absolute situation but rather the rate of change which matters. At this time, we observe the Chinese and European economies showing signs of improvement and the risk of monetary tightening choking off that growth to be further into the future.