Global equities thrived over 1Q of 2019


Markets will do whatever most investors do not expect. The first quarter (1Q) of 2019 surprised many market participants and commentators, particularly after the volatile market sell-off in December last year.

Equity markets worldwide have rebounded in the 1Q, with the MSCI AC World Index rallying 10.2% over the period in ringgit terms.

Markets grew optimistic on expectations of a potential resolution to the China-US trade dispute in February.

In the fixed income markets, the performance was mixed with global bonds, as represented by the JPMorgan Global Aggregate Bond Index, posting a 1% gain (2.3% in US dollar terms) over the quarter.

One of the major themes was the move taken by major developed central banks. The European Central Bank (ECB) effectively pushed back its intention to raise its benchmark interest rates in the summer of 2019.

The ECB also left its current balance sheet policy unchanged but launched a new series of targeted longer-term refinancing operations (TLTRO-III) that will commence in September 2019 and end in March 2021.

The US Federal Reserve (Fed) changed tack in its March meeting of the Federal Open Market Committee, lowering its projections of the Fed funds rate and effectively pushing back plans to hike interest rates further this year.

With regard to its balance sheet policy, Fed chair Jerome Powell announced the reduction of the Fed’s holdings of Treasuries would be slowed by reducing the cap on monthly redemptions from the current level of US$30 billion to US$15 billion (RM61.65 billion) in May 2019.

The Fed will also reinvest principal payments received from agency mortgage-backed securities (MBS) in Treasuries subject to a maximum amount of US$20 billion per month, with any excess to be reinvested in agency MBS.

This is with the intention to allow its holdings of agency MBS holdings to gradually decline over time in order to hold mainly Treasuries on the balance sheet.

In East Asia, China’s policymakers completed their highkey Two Sessions 2019 in March, rolling out a package of measures intended to support growth of the economy.

The Chinese government announced the GDP growth target for 2019 at a range of 6%-6.5%.

Fiscal and monetary policies will be adjusted to shore up growth, including measures such as tax cuts for certain industries, higher government expenditure and loans to private, small and medium enterprises to ease financing conditions in the real economy.

Hence, despite the rally year to- date, we are still positive on Asian equities as a whole. Valuation multiples remain relatively attractive, while investor sentiment has not improved as much as the rally in equity markets, with most investors remaining generally sceptical of the rebound thus far.

Moving forward, the trend in corporate earnings will drive markets. The bar is set low for a higher number of positive surprises, should they materialise.