Stimulus measures key to first quarter market rally
Stock markets around the world have bounced back in 2019 with positive gains in every single major market. This is a great outcome given how miserable markets were last year. However, it does seem slightly odd that markets are moving upwards when there are ongoing uncertainties clouding the backdrop such as slowing global economic growth.
In this scenario one would expect equities to struggle – however the fact they’ve soared ahead could suggest investors expect central banks to provide yet more support when times get tough. That isn’t necessarily good for investors over the longer-term as markets really need to stop being so dependent on stimulus measures.
WHAT’S GOING ON?
An end to interest rate hikes and quantitative tightening in the US has certainly stirred up investors’ interest regarding the prospect of more central bank liquidity.
US markets did relatively well in the first quarter of the year including a 16.6% increase from the NASDAQ 100 and a 13.1% gain from the S&P 500.
These returns pale in comparison to China which was the best performer in the first three months of the year with a 28.6% gain from the CSI 300, a market cap-weighted index replicating the performance of the top 300 stocks traded in the Shanghai and Shenzhen stock exchanges. Shanghai’s SSE Composite index was close behind, rising 23.9% in the three-month period.
Government fiscal stimulus initiatives seem to be behind the strong showing from Chinese stocks, as well as growing optimism that there will be an amicable solution to the US/China trade war.
Following earlier setbacks in the year, China’s purchasing managers’ index manufacturing data for March beat expectations. ‘We believe this was mostly the result of fiscal stimulus on new infrastructure production,’ says Iris Pang, economist at investment bank ING.
‘Though new export orders’ reading improved, it was still only at 47.1 in March (from 45.2 in February), indicating that export orders were still shrinking, albeit at a slower pace. This implies that external demand has not improved.
‘Moreover, trade negotiations are still ongoing. Even if there is a trade deal, we believe that the monitoring system will create continuous uncertainties on China-US bilateral trade,’ adds Pang.
WHAT’S HAPPENING IN THE UK?
While UK stocks haven’t matched the level of returns seen in the US and China, they have still delivered a decent performance. The FTSE 250 index of mid-cap stocks jumped by 9.2% in the first quarter and the FTSE 100 advanced by 8.2%. The latter is really welcome when viewed in the context of the index having fallen by 12.5% in 2018.
It would be unwise to expect markets to keep growing at this pace for the rest of the year.
Central banks, in particular, are giving support to equities but ultimately they are merely making life harder for markets. Investors have become too reliant on support and so markets face the risk of a large correction once central banks start to pull back.