2019 Perspectives

Monthly Equity Monitor

January 2019


“Global equity markets ended 2018 on a surprisingly bad note, with the MSCI AC retreating 7.4% in December. For the year as a whole it was down 9.5%, its worst showing in a decade. At this writing the MSCI AC is trading at just under 13 times forward earnings, its lowest P/E since 2013 (chart). The MSCI Emerging Markets P/E is less than 11 times forward earnings. At this juncture we continue to expect a 3.5% expansion of global GDP in 2019.”

“The recent slide of the S&P 500 leaves much bad news now priced in. To stabilize markets from this point onward we need: a resilient economy, good earnings, a steeper yield curve, a weaker U.S. dollar, and more visibility of a U.S.- China trade armistice. After a wave of downside economic surprises in recent weeks, the all-important U.S. employment report came in much stronger than expected for December — a gain of more than 300,000 payroll jobs. Though jobs growth is sure to slow in coming months, there is little to indicate that corporations are about to reduce headcounts (a sure sign of recession).”

“We argued last month that the future of financial markets had become less dependent on White House trade rhetoric (though calmer talk on that front would certainly help). We also needed the Fed to act. On January 4, Mr. Powell acknowledged that muted inflation provides more flexibility to set policy in the year ahead. With these comments the yield curve stopped flattening and the U.S. dollar softened. Since the S&P 500’s most recent low December 24, the greenback has lost ground against 27 of 31 major currencies. U.S. dollar weakness would go far to stabilize global financial markets.”

“At this writing the S&P/TSX is trading at about 12 times forward earnings, its lowest P/E in six years. Not since 2002 has the Canadian benchmark traded at such a big discount to the S&P 500. P/E compression has been particularly acute for Canadian banks. They are now trading at 9 times forward earnings, the lowest valuation in a decade.”

“This month we are altering our asset allocation in light of recent developments. In our December Equity Monitor, we said we would be ready to deploy more of our excess cash if the Federal Reserve were to set the stage for U.S. dollar depreciation and yield curve steepening by turning more dovish. Though the curve remains unusually flat, we think conditions for some steepening are starting to fall into place. Our cash position is reduced to market weight as we reallocate funds into equities.”

“We are modifying our sector rotation this month to reflect our relatively more optimistic view, reducing our exposure to Telecoms, Utilities, Real Estate and Consumer Staples. We are redeploying the proceeds in Financials and Healthcare.”

*** This extract from Monthly Equity Monitor, Highlights, National Bank, Financial Market, January 2019.

Stéfane Marion

Chief Economist and Strategist

Matthieu Arseneau

Deputy Chief Economist

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