Global risk asset markets have been reaching new highs, led by the US stock market with a gain of 3.1% for the month to date, while others have started to be relative laggards.
What has been the primary driver of the recent run-up? First of all, it can't be denied that profits have been a big push factor. Earlier, the consensus was bearish and few earnings surprises on the upside were expected. But results have differed from what many analysts were forecasting, due to the diminishing appreciation rate of the US dollar and improvements in global macroeconomic conditions.
On the macroeconomic side, global equity markets had been betting on the trade war between the US and China resulting in subdued or weaker economic growth. But China outperformed in the first quarter with 6.4% GDP growth, and the US surprised everyone with a 3.2% expansion, against forecasts in the neighbourhood of 2.2%. That put a sparkle in risk assets once again.
In the US, economic forecasters were off the mark on two counts. First, they overestimated the negative effect of the earlier government shutdown, which was only about 0.03% of quarter-on-quarter growth. At the same time, they underestimated the positive effect from private consumption expenditure.
So, what should investors focus on next? We believe that the primary concern over the next month will still be the finalisation of trade talks between the US and China. Earnings season will probably be muted after the market rally of the last few months.
The EU will remain in focus, specifically the European parliament elections, as Britain now appears to have no choice but to take part, even though it is supposed to leave the EU no later than Oct 31.
In terms of Asia investment, we believe that trade war tension will be tamed and that upward revisions of economic growth forecasts will soon start with Japan, followed by China, in light of better exports. We reiterate our recommendation from last month for a post-election rally in India from more stimulus policies. In any case, maintain a focus on the country level and valuations and ignore short-term noise.
Our domestic focus is on the formation of the government coalition in Thailand. We believe that more uncertainties await Thai investors in terms of structural changes and that the fiscal policy approval process will face a dead end.
In terms of strategy for the month, we still foresee great opportunities in risk assets, including equities, especially given unattractive fixed-income yields. We recommend countries that have cheap valuations with sustainable growth for 2019. Emerging-market equity picks are China and India, while our favourite developed market is Japan in light of an optimistic outlook for a US-China trade deal. The US stock market could rise on earnings surprises and a better economic outlook for the second half. We remain underweight in Thai equities given near-term political uncertainty.
KTBST will also choose to invest in several different mutual funds, including property funds for portfolio diversification in order to reduce risk from both domestic and international uncertainty.
