Investment managers bullish but not yet euphoric

Paul Sedgwick was asked to be on IG’s morning show for the analysis of the stock markets and macro-economic news. You can find a recording of this show at our Press Page

Equity markets took a tumble on Thursday in reaction to the increased threat the coronavirus virus may have to economic growth. There is a possibility that the outbreak will impact Chinese growth, however, if the 2002/2003 SARS virus is an indicator of the potential impact it is likely to be moderate and relatively short term.

Once again, we go back to the topic of the current bullish sentiment that equities are enjoying. The latest Merrill Lynch Fund Manager Survey suggests that bullish sentiment amongst fund managers has become more optimistic but, as yet, not reached euphoria. Part of the build-up in optimism for this year has been the improvement in the Citi economic surprise indexes across China the US and Europe. This has reinforced the view that an economic recovery will occur this year. Later on Friday, we get the latest flash Purchasing Manager Survey results from research house Markit, which may reinforce this expectation. This time last year the talk was of when, less so if, a global economic recession was in the foreseeable future. At the start of 2020, those fears have been relegated to the back burner.

Frank Investments spent the morning at the annual Moody’s credit conference. This conference is useful as historically where credit goes equities follow. Moody’s analysts did concede that ultra-low interest rates were not particularly a sign of a healthy economy. Various presenters pointed out that corporates had continued to borrow and that the quality of the borrowing continues to deteriorate. The chase for returns continues to suggest greater risk, that has been the case for some time. The end game, they had no real conclusions to offer.

The positives are banks balance sheets are far stronger than they were and many have reduced substantially their reliance on investment banking revenues. Governments have been borrowing at much cheaper rates and at the same time pushing out maturity. Moody’s see little possibility of rates changing in the short term. The probability remains that we may get more cuts this year, most likely from the Bank of England and the Bank of Canada. Christine Lagarde, in her first press conference as Chairman of the ECB, reiterated that the current monetary policy will remain in place. Whilst also undertaking a review of inflation. Equity markets remain supported by monetary policy, modest growth and subdued inflation. Investment managers after 10 years of caution are now getting bullish. That’s the worry.

We have added a recording of the recent interview on IGTV with Victoria Scolar