Getting Ahead Of The Fundamentals – January 13, 2020

After a blowout Q4, global equity markets have continued to rally in the first part of 2020, even with an escalation in Middle East tensions. Moreover, the economic data have not recently shown much improvement. The latter point is critical, as many equity bourses have front-run much better corporate earnings growth ahead.

A just-published report from MRB warned that many risk asset markets were getting ahead of the fundamentals. Moreover, our expectation for only a modest improvement in manufacturing and trade activity this year is at odds with the more positive expectations being discounted in an increasing number of equity markets and sectors.

The implication is that a digestion phase in equity markets looms once investors realize that a 2017-type strong economic rebound is unlikely, and that valuations are too stretched to sustain the rapid increase in equity prices. We remain mildly positive for 2020, but ultimately expect only middling total returns for the year as a whole.

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