‘Stick with quality and pare back on the hype’

CIO assesses the equity rebound but issues a note of caution over all-time highs and potential fear in the market

‘Stick with quality and pare back on the hype’

Global equity markets rebounded impressively in June but there remains reasons for caution, according to a chief investment officer.

Greg Taylor, of Purpose Investments, questioned whether the markets can keep climbing the "wall of worry" and believes that most of the credit for the strong start to the year is down to the abrupt reversal of the Federal Reserve’s rate hiking programme.

He said: “Many observers, including US President Donald Trump, now claim the Fed made a mistake last year by hiking rates. Fear of the supposed mistake was partly to blame for the sell-off in Q4 last year and the Fed’s reversal to a dovish stance in January is mainly responsible for the rebound.

“Markets went from expecting rate increases to now expecting three rates cuts by year’s end. The volatility resulting in this change has, of course, affected bonds, stocks and currencies.”

He added that analysts continue to expect a strong recovery in the second half of the year to offset the slow start to earnings and that second quarter earnings reports will [tell us] if executives have any further clarity on their operations or if they’ve seen an increase in sentiment.

Another reason for wariness around the rebound is that the more notable moves came from gold and Bitcoin. With the dollar dropping on the Fed’s comments, gold is surging and ended the month more than $1400/oz.

Taylor said: “What may be related is the move in bitcoin and the other cryptocurrencies. Bitcoin, which many had written off, is now up over 200% on the year and taking aim at previous highs. Both gold and Bitcoin moving higher could signal fear is creeping back into the market.”

The bounce back in the stock market could also, of course, be down to the return of TINA (there is no alternative) with the US 10-year treasury at 2%. And with a trade truce and a hawkish Fed unlikely, risk assets look to be in decent health for a while, although Taylor expects the market should experience higher volatility for the balance of the year.

He said: “The pressure will be intense on the Fed to cut rates. Corporate earnings will be analysed for any signs of weakness resulting from trade wars. But there is a fine balancing act under way. Unless peace breaks out and all trade disputes disappear, it’s unlikely we will see a hawkish Fed anytime soon, which should benefit risk assets. Many observers, including US President Donald Trump, now claim the Fed made a mistake last year by hiking rates.

“If earnings and economic data start to improve, is there really a need for rate cuts? Any hint of hawkish comments could shake the markets. With equities at all-time highs, the risk/reward may not be an ideal set-up to go ‘all-in’ on risk. Investors should stick with quality and pare back on some of the more hyped parts of the market.”

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