Time flies when we are enjoying a market rally. That has been the case for the past couple of months and as the earnings season draws to a close. The primary tailwind pushing shares higher has come from optimism that the United States and China are close to a trade deal, and signals from the US Federal Reserve that it is easing off on interest-rate increases.
Global risk assets have been responding to the good news. Since the beginning of 2019, the CSI 300 Index of Shanghai and Shenzhen shares has gained 21.88%, followed by the STOXX Europe 600 (10.35%) and the S&P 500 (8.67%). The SET Index has risen by a modest 5.82% by comparison.
Trade-talk sentiment has played an important role in the past two months. It is noteworthy that the Chinese stock market has been driven by consumer discretionary, financial and communications shares, which are the dominant sectors pressured by the trade war. The primary risk has been coming from Western markets, with the approaching Brexit deadline on March 29 weighing heavily on sentiment in Europe, for example.
KTB Securities maintains a cautious global economic outlook for March, keeping in mind political and policy risk. Our first concern is uncertainty about the Brexit outcome. Prime Minister Theresa May is having trouble persuading the EU to change the Brexit agreement, and even more trouble getting parliamentary approval at home for the deal now on the table. The next vote is on March 12, and if deadlock persists, she may seek to delay the exit for two months, as no deal at all is seen as unacceptable.
Our second concern is the Federal Reserve's monetary policy stance. The US economy might face some cross-currents, with conflicting signals reflected in muted inflation. Monetary policy going forward will thus continue to be heavily data-dependent. This could lead to volatility in stock markets.
However, we still foresee opportunities in risk assets, including equities. The strategy we recommend is to focus on assets in countries that have cheap valuations with sustainable growth for 2019. We prefer investing in equity over fixed income and are mainly overweight on emerging markets like China. Our favourite developed market is Japan.
We also recommend investing in different funds for diversification, including property funds, in order to reduce risks from other factors and uncertainties both international and domestic, such as Brexit and political risk in Thailand as the election draws closer.
