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Market Comment March 2019 - One swallow does not a spring make

After a horrific fourth quarter in 2018, markets have rebounded with double-digit gains for equities. Investors who have been invested all along enjoy the ride, but the general feeling remains one of caution. It would appear as if the easy money had been made, with a classic rebound gaining plenty of support from central banks spooked by financial turmoil that peaked in December.

Eventually, a moment of truth for financial markets will arrive. This year’s V-shaped recovery requires not just positive outcomes from Sino-US trade discussions and China stimulus but also an improving global economy that ultimately affirms the bullish performance of equities. Leading the charge are China’s surging markets, but still, there is an element of caution about A-shares. On this side of the Atlantic, Brexit has not been resolved and the uncertainties keep weighing on the market and the economy.

An interesting reading comes from State Street’s confidence index based on its analysis of the actual buying and selling patterns of institutional investors. For all the power of dovish central banks and hopes of a US-China trade deal, together with a stimulus from Beijing extending the economic cycle, investors are still sitting on the fence. A reading of 100 is neutral or a level where investors are neither increasing nor decreasing their long-term allocations to risky assets. The State Street Investor Confidence index has continuously dropped since last summer and as of February 27 stands at 70.9, only slightly up from its low in January. The bullish thesis is that investor confidence is at levels that are the“darkest before dawn” and so mark a pending upturn. Throw in a trade deal and things really look good for equities and credit.

Indeed, there has been a distinct uptick in future earnings estimates - even versus strong trailing earnings - across most mature and emerging markets over the past several weeks. Until now, Wall Street and global equities have enjoyed a classic case of bad economic news being good news. Weakening data that keep the US Federal Reserve and other central banks on pause is fine, but a more pronounced slide in economic figures that fans recession concerns is another mature are now entering a cyclical downturn or if data weakness can be attributed to last Summer’s drought in Europe which limited shipping on the Rhine (affecting the chemical industry), delays in producing cars with the new specs as stipulated by the EU and Lunar New Year festivities in Asia.

The market’s great hope of a silver bullet comes in the form of a trade deal. Such a deal would boost sentiment although market optimism over a trade deal also downplays the messy details and the likelihood any agreement does not really change a testing China-US commercial rivalry. That leaves an equity bounce requiring evidence of a similar V-shaped recovery in economic data. While benign monetary policy is risk appetite-positive, both sluggish global growth rates, and, the mature stage of the business cycle, suggest we may see a small V-shaped recovery.

Sentiment remains a key driver of flow and market direction which we cannot influence.We continue to focus on fundamental data at the corporate level to find good companies that will weather the storms and reward their investors handsomely.

After the heavy correction in 2018, some companies are trading at low levels. It may take some patience to reap huge profits but that will not worry us: we are in it for the long run.

Switzerland, March 3rd, 2019

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