September 2018 - Taking Advantage
After a shaky market during the first half of 2018, this last month have brought a sense of calmness. Equities did well and the VIX Index has returned to its January low levels. Moreover, global economy continues to deliver strong growth. The global growth momentum is still here. Indeed, the MSCI All Country World Index is up 1.47% for the month of August. Even so, trade tensions between the U.S. and China continue to affect the market sentiment and the Chinese assets. The total return of MSCI China Index for the month of August was -2.94% following the return of -2.40% for the month of July. The past month also began with tensions between Turkey and the U.S. In fact, the Turkish Lira has declined by 22% versus the US dollar this past month and by 43% year to date. In favor of solid fundamentals, we believe that the growth set to remain good.
Between January and April, the global growth was down. However since June, the global growth has recovered and reaccelerated. Major economies are still presenting solid fundamentals. In the U.S., we anticipate GDP growth of 2.8% in 2018 thanks to strong corporate earnings and credit flows to the private sector. In the Eurozone, the reacceleration of lending to firms and households helped expectations of growth of GDP by 2.1% this year. In China, in order to avoid potential shocks due to trade tensions, the RMB was depreciated and we believe that for the rest of the year the activity will recover. We expect the global growth will continue to persist in the last few months of the year.
Within equity markets, the S&P 500 has reached a new historical level. On August 21th, the Index closed at 2,873.23 compared to its previous highest level on January 26th at 2,872.87. Out of 467 companies in the S&P 500 that published their quarterly results, around 70% beat their sales expectations. The US tax reform will also gradually support their revenues. Within the eurozone market, more than 60% of European companies have announced earnings that indicate solid revenues. According to statistics by Bank of America Merrill Lynch, EUR/USD remains an obstacle. We have a positive view on global equities as we continue to believe in the growth momentum.
The emerging market was one more time stressed by the conflict between Turkish and the U.S. at the beginning of August and new US sanctions against Russia. In fact, the MSCI EM Index underperformed this month compared with its outperformance in July. EM currencies are affected by the stronger USD. This kind of cascade effect show the weakness of emerging markets against the U.S. market. Within EM debts, emerging market sovereign debt hard currency valuations look much more attractive and offer a better compensation for risk.
Corporate credit continued to underperform equities in August, with the Barclays U.S. Aggregate Index up 0.84% versus a 3.37% gain of the S&P 500. As the USD yield curve is flat and the global economy remains robust, we continue to prefer short duration credit.
Undoubtedly, the market is dealing with a number of moving pieces ranging from politics to trade against a backdrop of less liquidity, higher rates and a slowdown in the momentum of growth. Risk assets have responded in kind. Still, the fundamentals remain encouraging and recessionary risk remains low this year. On this basis, we continue to advocate a cautious strategic long position in equities given our belief in the underlying economic picture. In our view, generating positive returns requires increased flexibility and the ability to look through periods of higher volatility. In that context, risk-management combined with rigorous sector and geographical selection will remain key factors for investment performance.