Perspectivas de Inversión 2019

Executive Summary

Global financial markets were affected badly by the geopolitical landscape

In the wake of the unusually smooth financial markets observed in 2017, the past year has been a quite dramatic wake-up call for investors. Early-year euphoria in equity markets gave way to rising anxiety, due not only to economic and political issues, but also to extreme market behaviour.

If the U.S. economy was by far the brightest spot, reflected by outstanding corporate profits, a deceleration of growth was observed across other regions, in China and Europe in particular. This weaker economic trend was compounded by the escalating impact of the trade war led by Donald Trump on the rest of the world, with China being his main target. Financial markets were also affected by a number of political uncertainties which proved to be more detrimental than was the case during the previous years; the resolution of some of these issues are among the key factors for an improvement of the fragile sentiment currently prevailing in the markets.

Model-driven trading brings chaos to the equity markets

The behaviour of equity markets towards the end of
the year has been very extreme and difficult to justify; the overwhelming proportion of computerized trading, which has grown over time to around 85% of trading volume, goes a long way to explain the violent intra- day swings and daily returns, especially in a context of lower liquidity. Machine trading didn’t cause problems during the bull market, but models have triggered indiscriminate selling more recently on the back of weaker economic signals and market momentum. While it is impossible to predict when markets will have regained their composure, economic fundamentals and corporate profitability should drive market performance over the long term and not these short-term trading models.

Negative returns have been observed across most asset classes

The drop of global equity markets was the main culprit for the disappointing performance in 2018, but this headwind was compounded by the overwhelming number of asset classes with negative yearly returns. Even truly diversified portfolios failed to offer the usual levels of protection that could have been expected in such market conditions.

According to research produced by Deutsche Bank at the end of October, 89% of assets were in negative territory, in dollar terms. That was the highest percentage on record based on data going back to 1901. Even if this number decreased somewhat during the last months, it still reflects a situation where the vast majority of global assets’ valuations were supported by extreme monetary policies.

Equities still offer the best value

We do not share the current pessimism observed in financial markets and our allocation into equities remains slightly overweight. We do not dispute the fact that economic growth has peaked, but global growth should remain solid and we do not anticipate a recession in the coming year. Valuations of equities appear low considering the outlook for earnings, bearish sentiment is excessive and the turmoil within equity markets should prove to be temporary. Economic fundamentals and corporate earnings drive equity performance over time and there now appears to be a dichotomy between what the markets are anticipating and what economic data and corporate earnings are indicating.

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