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Market Comment August 2019 - The Summer of 2019 - All Eyes on the US

The rites of summer are upon us and Europeans are heading for the beaches. Meanwhile, as temperatures reach new records, valuations of assets also go ever higher and financial markets are upbeat. This is in stark contrast to the gloomy outlook central bankers seem to observe as they are heading for more rounds of interest rate reductions in the US, the UK and more Quantitative Easing in the EU. Be that as it may, lower interest rates will boost the value of financial and real estate assets even more. Equity valuations are not dependent just on the interest rate level alone; there is also more good news around to support valuations: • The earnings’ season is in full swing and overall S&P 500 earnings growth for the median company is on pace to be just over 4%. Sixty-nine percent of companies are beating earnings forecasts, and by a wider margin than average. • US consumer spending grew at a 4.3% real annualized rate in 2Q and is consistent with comments from the banks and results from large consumer companies such as Coca-Cola, Starbucks, and McDonald's. E-commerce, internet advertising, enterprise IT spending, and aerospace also remain solid, and there are indications that global oil and gas spending is picking up. There are still pockets of weakness in Europe and China. Disappointing automobile sales in both regions are rippling through global manufacturing supply chains. This is having a negative impact on industries as diverse as semiconductors and chemicals, witness the recent profit warning from BASF. Semiconductors are also contending with a mature global smartphone market and a pause in data-center spending after a very rapid pace in 2018. The trade war looks likely to be with us for some time and is leading to adjustments of global supply chains. China which was meant to ‘lose’ this war seems more resilient than ever: the official 2019 second-quarter gross domestic product statistics showed the growth rate slowing to 6.2 per cent year on year, the lowest rate for more than two decades. But activity seems to have recovered towards the end of the quarter, and the latest estimates show growth running at close to 7 per cent. Consumption has responded well to tax cuts and infrastructure investment has rebounded as local government debt issuance has surged. More surprisingly, while exports have dropped 1.5 per cent in the past 12 months, imports have dropped 7.8 per cent. Earnings growth are expected to improve based on supportive leading indicators: favorable access to capital, very low new claims for unemployment insurance, and a recent improvement in capital goods orders to a new high. For 2020, we expect S&P 500 earnings growth of 7%. The expected reacceleration in earnings growth should support further market gains, and we are overweight US stocks. While central bankers reduce interest rates before heading off to the beaches they will contemplate the limits of monetary easing. Mr. Draghi has explicitly asked for fiscal support to boost the region’s economy. If your portfolio consists of solid companies, you will be able to enjoy the break and not worry about any stimuli or the heat.

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