Global Equities – Expectations In our last quarterly report, we noted that equity markets had become 15-20% cheaper due to sell-offs in 2018, and that corrections typically end when central banks stop tightening. In January, the US Federal Reserve announced a rate hike pause, citing softer economic growth and muted inflation p ressures. The European Central Bank also announced that it does not expect to hike rates until 2020 at the earliest. Equity markets responded strongly to the more dovish stance, posting gains of about 15% in the first quarter. As a result, current prospects are for weak to moderate economic growth and continuing earnings growth combined with accommodative monetary policies. At the same time, a key risk factor has been eliminated, as economic growth and equity market gains are often curbed by risk-off sentiment if monetary policies are (too) tight. The new signals may be seen as an indication that the central banks will not allow major sell-offs in the equity markets, and that has fuelled investors’ risk-on appetite. The new signals may be seen as an indication that the central banks will not allow major sell-offs in the equity markets, and that has fuelled investors’ r isk-on appetite. The first-quarter gains mean that equity markets are no longer cheap, as gains have been driven by falling risk premia. Further gains must be based on rising corporate earnings, but the current outlook is fairly moderate with 2019 consensus forecasts of Figure 1 % 4 Yield spread between 10-year and 2-year yield as an economic indicator 3 2 1 0 -1 -2 -3 1976 1979 1982 1985 1988 1991 10-year vs. 2-year US yield curve US recessions Source: Macrobond as of Apr. 2019 1994 1997 2000 2003 2006 2009 2012 2015 2018
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