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Cambridge Weekly Update 23 April 2019

 

Spring time from here?

It is quite incredible how much investor sentiment has changed over the past 4 months. At Christmas, equity markets had suffered a decline from their September highs, which had many market commentators suggesting that the end of this prolonged economic cycle and investor bull market must now surely be imminent. Fast forward four months and stock markets are up 10-15%, have thus recovered most of their Q4 2018 falls and already there is talk about the potential of an equity ‘melt-up’ as Goldilocks conditions appear to have returned.

 

China grows but risks remain

China’s equity bull run continues. On Tuesday, the CSI 300, representing the largest companies on the Shanghai and Shenzhen stock exchanges, shot up 2.8%, while the Shanghai Composite index added 2.4%. Chinese equities mostly traded sideways for the rest of the week, but Tuesday’s big jump only added to what has been an extraordinary year so far for the country’s stock market. At the time of writing, the CSI 300 is up over 37% since the start of 2019. Increased optimism around China’s economy and the future of Sino-American trade relations have made Chinese stocks the best-performing in the world this year.

 

Japan losing some of its shine

By some measures, the Japanese economy has been producing more than its relatively scarce resources can sustain in the long-term, a situation referred to by economists as a “positive output gap”. We wrote about this a couple of weeks ago – explaining how that tightness could be a catalyst for consumers and businesses to spend and invest. To do that, both sectors of the economy need to expect jobs to remain plentiful and well-paid for a long time. Otherwise, instead of spending, they’ll save.

 

Untangling the confusing Q1 corporate earnings update picture

It’s quarterly earnings season again, with most announcements due over the next few weeks. Q1 earnings are likely to be more mixed than in previous quarters and macro momentum appears consistent with negative rates of EPS growth on a year-on-year (YoY) basis in both Europe and the US.

 

 

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