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Investing is a curious mixture of art and science. It is a world of phenomenally fast algorithmic trading, supplemented with old-fashioned sayings and adages concocted decades ago. Behavioural finance studies draw attention to the importance of ‘heuristics’. These are mental shortcuts or rules of thumb that ease the cognitive load in decision-making.
The saying “sell in May and go away, come back on St Leger’s Day” is familiar in investment circles. Such advice might appeal after the strong performance of global equity markets so far in 2019. Broadly speaking, risk assets have enjoyed their best start to the year since the 2008 financial crisis. For example, for the US S&P 500 Index, 2019 is its fourth-best year in the past 92 years, beaten only by 1943, 1975 and 1987.
Time to take profits? There are indeed arguments for re-assessing some of the better performers. Corporate bond markets no longer look so attractive as they did a few months ago. A number of high-profile technology stocks are stumbling under the weight of expectations. China’s A-share market had risen close to 30% year-to-date on hopes for a recovery in economic activity. However, it was subsequently knocked off its perch. This followed adverse Trump tweets about the state of US/China trade talks. Added to this were mixed signals from Chinese policymakers about how supportive they needed to be.
A second adage cautions “it is better to travel than arrive”. In our view, there are strong reasons to believe the journey isn’t over. Across global equity markets, prospects still look favourable in terms of the profits cycle, policy backdrop and investor positioning.
The US first-quarter earnings season has been generally upbeat, with a high proportion of companies beating analysts’ forecasts. Although annual growth is just 2 to 3%, firms are optimistic about stronger growth ahead. This is lifting equity market confidence.
Meanwhile, economic data in Asia and Europe has stabilised in the first quarter. While the manufacturing sector is still in recession, policy stimulus should bring this to an end. We expect better economic statistics in coming weeks and months.
On top of this, surveys suggest a large number of investors are still positioned cautiously. Cash levels have been reduced but remain above average. Global portfolios are generally underweight more cyclical markets such as Europe. The same is true of more politically sensitive markets such as the UK.
The trade dispute between the US and China is a good example of the problems that can arise during any journey. Investors were heartened by assurances that trade talks were on track, and so Trump’s latest tweets came as rather a shock. Of course serious disagreements over intellectual property are still to be resolved. Nevertheless, an eventual agreement would benefit both governments. The trade war has been an impediment to investment decision-making. Its removal should, at the very least, be positive for investor sentiment.
All in all, our final adage is “run your winners”. With this in mind, although we have lowered our overall exposure to risk assets, our stance is not defensive. We are looking for buying rather than selling opportunities, as we journey onwards.