Market Outlook Q3 2019: Top questions on investors’ minds

Following their exuberant performance at the start of 2019, the about-turn by financial markets during the second quarter have left investors wondering: should they stay at the sidelines or remain invested? Christian Gattiker, Head of Research, as well as Mark Matthews, Head of Research Asia, share their views on how financial market corrections should be viewed as entry points, rather than the end of the bull market.

Equity markets have struggled during the second quarter of 2019. Should investors be concerned? 
Christian Gattiker:
If we take a step back, we can see that stock market corrections are normal. In the past 10 years, there were 23 times the S&P 500 index went down 5% or more, and the average of those 23 times was a drop of 10%. 
But remember, even including those 23 times when the S&P fell by that much, it still returned almost 300% over the past 10 years.  

S&P returns over the past 10 years Source: Bloomberg Finance L.P., Pension Partners

With a dovish Federal Reserve and low interest rates in the United States, which asset classes are primed to benefit from the current macroeconomic environment? 
Mark Matthews:
We think that capital will continue to move into US high yield bonds. Trade friction doesn’t change the fundamental strength of the US high-yield bond market, where we see default rates falling further.
 

US default rates forecasted to fall further Source: Moody's, Bloomberg Finance L.P., Julius Baer

But you never know, the world is a funny place, things can change at short notice either for the better, or for the worse. 
One thing we can and do foresee is a significant growth slow-down in the economy of the United States next year, and very possibly a modest recession in 2021.

Which region looks attractive now? 
Christian Gattiker
: We are positive on emerging markets. Their sudden sell-off in May has made them inexpensive again. Inflation is not a problem for them this year. And of all the stock markets in the world, they are the most sensitive to a rising US dollar. So they’ve struggled in recent years with the strong dollar. But our economists foresee a weaker dollar in the second half of this year, which would be helpful for emerging market stocks.

Emerging market stocks attractive following sell-off MSCI Emerging Markets vs MSCI Developed Markets (Source: Bloomberg Finance L.P.)

We also like higher yielding emerging market hard currency bonds. As the search for yield continues, these bonds should continue to do well. However, investors should focus on issuers that have sound liquidity, manageable leverage and access to funding.

Yields of emerging markets hard currency debt vs US treasuries Source: Bloomberg Finance L.P.

To conclude, investors shouldn’t worry about the ups and downs of markets in the short term.  Keeping calm and staying invested are essential to wealth creation over the long term. 

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