The Rebound

European equities: In line with the rest of the world

US equities: More favorable prospects 

Global stock markets, which rose significantly, almost completely recovered the December losses.

A more optimistic view on a possible US-China deal and a more dovish FED stance gave stock markets a much-awaited oxygen boost. Fundamentally, the economic environment didn't change that much, though. Global growth is still slowing, there is still no trade agreement between China and the US (despite constructive signs of progress), Brexit is still a big uncertainty and earnings are still being revised downwards.
The US government shutdown has temporarily ended, with Trump agreeing to fund federal agencies for three weeks, while he hopes to secure a deal to fund the US-Mexico border wall.

We increased our IT exposure to be strongly “overweight” as the US-China trade talks gave out constructive signs of progress. We kept our “overweight” in Health Care (with a reasonable valuation) and our ‘neutral’ position in Real Estate, as long-term yields were still rather low.

Emerging equities: Positive reversal situation

Emerging markets rose in January, outperforming Developed countries. The Fed’s dovish shift, EM FX rally and positive headlines on trade tensions pushed up all EM asset classes.

Brazilian equities were the best performers, on the back of positive momentum for the country after the inauguration of the new government and a dovish Fed. Turkish equities rallied strongly as well, amid low valuations and a stronger Turkish Lira. As fears of further Fed hikes subsided, high-carry currencies came back into favour.

The Chinese equity outperformance was driven mainly by easing US-China trade tensions, a ramping-up of domestic easing policies, attractive valuations and the Fed’s shift to a dovish stance. The latest round of high-level negotiations between the US and China concluded at the end of January with no ‘real’ deal but with both sides sending out constructive signs of progress.

In India, sentiment locally was impacted by a mixed 3QFY19 reporting season and investor concerns about companies with perceived lapses in corporate governance and about macro variables deteriorating somewhat during the month as crude oil prices rallied. In Taiwan, markets started the month with a sharp sell-off following an unprecedented 8% cut from Apple to its December quarterly revenue guidance. Markets recovered from the initial drag, likely helped by expectations of the Fed turning dovish, positive developments on US-China trade negotiations and positive commentary from China on policy efforts to stabilize growth.

Within Emerging Markets, all sectors ended the month positively, with cyclicals – led by Consumer Discretionary – outperforming defensives in general.

We decided to increase our Chinese exposure to ‘overweight’, as current government stimulus was thought likely to support the region, e.g., infrastructure and alternative energy investments. Valuations for most emerging markets are still attractive, while US-China negotiations will continue be key to overall market sentiment and direction. The focus will remain on the Fed monetary policy (economy-driven end of rate increase), its balance sheet and the US dollar evolution. China growth trend, monetary and fiscal stimulus efforts, and the trade discussions will also be key.