Curmi & Partners

Approaching a Crossroad

Article by David Curmi 

Last Saturday I had the pleasure of attending a seminar organized by the Malta Stock Exchange Institute where I sat with a panel of fellow colleagues from the industry to discuss the investment outlook for various asset classes, both locally and internationally. The focus in asset classes gave me food for thought on where we are in the current investment cycle.

It struck me that we are likely at another major turning point in terms of some major trends that we have been experiencing over recent years, particularly in the US, and given that this market plays such an influential role throughout the world it is reasonable to expect there to be some significant knock on effects in Europe too. 

The US has been growing at a strong pace over recent years, especially for an economy the size of the US.  This has brought unemployment down to an almost full employment level, and allowed the Fed to not only reverse its stance on Quantitative Easing but also raise interest rates numerous times throughout the last 24 months.  From a low of 0.00%-0.25% through to 2015, the Fed funds rate has now been raised on eight occasions to the current 2.00-2.25%.  More increases are on the cards. A final rate increase is expected later this month, with 2019 forecast to bring a further two or three increases.  But this is where it looks like it will stop.  The US economy is now showing some early signs of fatigue and with the impetus of this year’s fiscal stimulus waning, a slowdown in US economic growth looks likely.  The US treasury markets are also signaling potential trouble lies ahead as the US yield curve turned negative earlier this week, causing markets to fall amid concerns that a recession may be on the way.  This may be a little harsh but the clear signs are that we are past the peak for economic growth in this cycle.  As this plays out, the direction of interest rate movements will also change, and with them bond prices.  Any slowdown will also impact corporate profitability questioning the sustainability of valuation levels in the US.

Where does this leave Europe? Certainly a slowdown in the US will impact Europe.  The key is whether Europe is capable of withstanding this slowdown, coming at a time when there are some key issues here too.  Economically there are some signs of a slowdown but perhaps the bigger issues come in the form of Brexit, the Italian budget and the resurgence of the far right throughout Europe.  With interest rates still very accommodative one hopes that there is sufficient economic resilience to see through the chill winds coming from the US.  

This uncertainty is likely to force Mario Draghi’s hand in pushing him to take a cautious approach to raising rates, whilst volatility in the market is also likely to increase, reflecting the clouded outlook.

So where does this leave the issue of which asset classes look attractive at this point in the cycle? Given the backdrop I would hazard to say that my preference is more skewed towards picking individual stocks rather than asset classes.  There don’t appear to be any big mega trends that normally move asset classes in sync hence 2019 is starting to look like another tricky year. Given the lower valuation in European equities I have a slight preference for value in Europe rather than in the US and I would not be too surprised if the fixed income market in Europe does not perform as bad as many players expect.  

My one hope is that we hear less of Trump.  Oh, and a resolution to the Brexit mess!  

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.