5 reasons to buy US stocks
By Peter Rosenstreich
Goldilocks stocks are back. Here’s why: 1) weak inflation 2) historically low interest rates 3) stable monetary policy 4) solid economic growth and 5) improved earnings outlook. These conditions will be in place for 2019.
The US Federal Reserve’s path to hike interest rates toward neutral is no longer a priority. The Fed accepts that inflation will continue above its 2% target. Fed forecasts indicate that after a brief rise, inflation will remain below 2% for several years. This would be positive for equity but negative for bonds. Tightening triggered a volatile Q4 2018, with meaningful risk reductions and repricing of stocks. The Fed is unlikely to shift from its neutral bias in the near term and is likely to announce that it will halt balance sheet reduction. The Fed will rebalance holdings by running down mortgage bonds but increasing Treasuries.
US economic growth should retain a decent pace. Recession in 2019 is still a low probability. The global economy has slowed, fears of a trade war are not helping. But there are signals of stabilization, with expectations of 3.5% GDP growth for 2019. And the US election is likely to have real disruption potential. Battle lines have been drawn and the fight will not wait until 2020. As in 1860, this presidential election will be extremely contentious, forcing investors to question the stability of US democracy.
Japanese economy decelerates
By Vincent-Frédéric Mivelaz
The Bank of Japan says that inflation is accelerating and does not need expansive monetary policy, but the economy is expected to weaken further. GDP growth was 0% for 2018, including a contraction of -2.60% in Q3. Momentum is fading: the manufacturing PMI fell for the first time in 2.5 years. The decline comes from weaker sales to China amid continued trade frictions and weaker domestic manufacturing demand. In the event of an agreement between the US and China, the economy might be facing difficulties, as China’s pledge to buy semiconductors from the US could hurt the third largest electronic product industry in the world. No changes in Japan’s labour market, with January’s jobless rate at 2.50% (prior: 2.40%) and still its lowest range in 26 years. With the prospect of a US-China trade deal as early as mid-March, safe haven JPY is less in demand. We expect a rebound of USD/JPY from late February’s low (110.59) to sustain in the coming weeks. Currently trading at 111.98, USD/JPY is heading along 112.20 short-term
Asian shares bounce
By Peter Rosenstreich
Asian stocks were higher across the board today as the MSC Index said it would increase weightings of Chinese mainland shares in its EM index, which is followed by over USD 2 trillion of assets. This is a meaningful shift: EM stocks and FX responds to flows. Of course this reallocation will not occur all at once; that would overwhelm investors and disrupt normal market behaviours. Saudi Arabia and Argentina will enter the index with a total of 2.9% weight, but the big new is China A-Share weight will climb 5x to over 3%.