Equity markets during the second quarter of 2019 extended the positive trend witnessed in 2019. This was mainly driven by the continuation of the expansionary stance being taken by various central banks. One of the major questions of the quarter was once again the outcome and implications of the US-China Trade war. Such issues caused a temporary sell-off in stock markets in May, before recovering towards the end of the quarter due to hopes of progress in talks.

The US S&P 500 index set a new record high, while the US Fed indicated that rate cuts might be announced in the coming months, despite not doing so in June. Similarly, Eurozone equities performed generally well, as the ECB seems to be willing to pursue its monetary easing policy. Meanwhile, UK shares also posted gains, despite Brexit and political uncertainty, with the resignation of Prime Minister Theresa May being the most notable event of the quarter Elsewhere, Japanese shares and Emerging markets equities relatively underperformed the other developed markets.

Bond markets posted gains throughout the quarter, both on the sovereign debt front, as well as in the riskier assets markets.  Such a performance is an indicator that the markets are expecting central banks to extend their loose monetary policy, including the possibility of a rate cut by the US Fed. This view was further confirmed by comments made by both the Fed and the ECB in June, in which the tone was increasingly dovish.

EUROZONE

Equities in the Eurozone advanced, as good performances in April and June outweighed losses registered in May. Information technology, consumer discretionary and industrials were some of the best performers over the three month period. Areas such as semiconductors and car makers had quite a volatile quarter, as the persistent trade tensions stimulated mixed opinions for investors. Trade war talk was relatively calm during the final month of the quarter, and as a result the market recovered from the growing concerns that affected the markets during May. The proposition by Berlin’s city government to put a freeze on residential property rents between 2020 and 2024, had a negative impact on the real estate sector.

The president of the European Central Bank, Mario Draghi, hinted that if inflation in the Eurozone does not improve, further monetary policy easing may be required, possibly through new bond purchases. Inflation for June was consistent with the figure for May, which was 1.2%, while the Eurozone’s GDP growth for the first quarter of the year was confirmed to be 0.4%. The flash composite Purchasing Managers’ Index was at its highest point in over seven months in June, signalling improving conditions. In Spain, the Socialist Party emerged as the largest party following the general elections held in April. Italy’s budget deficit is expected to exceed its originally agreed level by the European Commission, following a cut in the Italian GDP growth forecast from 0.2% to 0.1%. As a result, Italy’s fiscal position is once again in the spotlight.

UNITED STATES

US shares performed well in the second quarter of 2019. In fact, the S&P 500 reached a new record high, despite considerable market uncertainty during May related to the US’s trade stance. Markets reacted positively to the Federal Reserve’s continued dovishness and to signs of progress with regards to trade tensions, towards the end of June. In May, President Trump hinted about the possibility of imposing tariffs on Mexican imports as well as increasing the number of goods imported from China which shall be subject to tariffs. Such statements caused a market sell-off in May, but markets eventually recovered in June, driven by Trump’s decision to indefinitely suspend the Mexican tariffs, and the progress registered in the US-China talks.

US GDP grew by 3.1% in the first quarter of 2019, marginally lower than the expected figure of 3.2%. Employment data remained positive, despite a relative slowdown in June. Furthermore, the unemployment rate remained at the lowest point in over 49 years at 3.6%, whilst average hourly earnings rose by 3.1% over the previous year, also slightly lower than expected.

In June, the Fed did not lower rates but it did suggest less stringent policy moving forward. Predominantly, cyclical areas of the market registered gains, led by financials, materials and IT. On other hand, more defensive sectors such as healthcare and energy stocks declined during the quarter.

UNITED KINGDOM

Equities in the UK generally continued on their strong start to 2019. One of the most notable positive performers was the technology sector, while numerous leading consumer goods companies also posted solid gains. However, due to the ongoing political uncertainty mainly related to Brexit, most domestically-focused market sectors performed poorly. In June, Theresa May resigned from her role as UK prime minister, which kick started the process for the conservative party to elect a new party leader, and prime minister. Although the Brexit deadline was pushed back to October 31, it is still uncertain as to how the new leader may intend to move forward. The UK manufacturing sector is clearly one of the sectors which are being affected the most by the uncertainty surrounding Brexit. Although GDP grew by 0.5% in the first quarter, it was revealed by the Office for National Statistics that the economy actually contracted by 0.4% in April, primarily because of a sharp decline in car production.

EMERGING ECONOMIES

Emerging markets performed well overall throughout this quarter despite high levels of volatility. Trade talks between China and the US broke down in May as tariffs were implemented by both sides. The global trade uncertainty, caused countries such as China and South Korea to register a relatively poor quarter. However, towards the end of the period, the situation seemed to improve as further tariff hikes were paused following the G20 summit. The prospects of progress in trade talks, as well as expectations of a Fed rate cut boosted investor sentiment. Although the MSCI Emerging Markets Index grew, it underperformed its global counterpart, the MSCI World Index.

Argentina was one of the best performers, driven by positive developments prior to the October presidential elections. South African markets reacted positively to the re-election of the African National Congress Party, while equities in Indonesia and Turkey also performed well. Similarly, Russia also beat the average performance of the index, mainly due to a strong performance by Gazprom, as well as the fact that the Russian Central Bank lowered interest rates in June by 25 basis points to 7.25%, and hinted towards further easing throughout the year.

MALTA

Local equities continued on the positive performance of the first three months of 2019, as the MSE Equity Total Return Index advanced by another 4%. A total of 16 equities gained ground during the three month period, seven of which posted double-digit gains. Most of the gains were driven by the publication of financial results for 2018. The top performer was by far Trident Estates plc which hiked 44.4%, followed by RS2 Software plc with a 24.5% price increase. On the other hand, no less than eight equities were a drag to the index. Malta Government Stocks continued on their impressive 2019 rally, as the MSE Malta Government Stocks Total Return Index was up by another substantial 3.87% – in line with the broader European sovereign debt market. The corporate debt market also continued to trade in positive territory, with the MSE Corporate Bonds Total Return Index posting a more modest gain of 0.82%.

WHAT LIES AHEAD

Such periods of mixed signals by markets and macroeconomic data, may result in additional risk, but also opportunities for investors who proceed with caution. As the major central banks seek to support the markets by utilising expansionary monetary policies, we believe that portfolios should try to find the perfect combination of multiple asset classes, such as equities and bonds, as these might offer different risk-reward characteristics and diversification benefits when combined together in one portfolio.

With this in mind, our actively managed Merill strategies continue to offer the opportunity to long-term investors to take advantage of the current economic and market environment through a diversified portfolio of growth and income assets. At the same time, defensive positions remain an integral part of our strategies, in order to offer protection to the value of portfolios during periods of poor market conditions. Another important part of our philosophy, is diversification through different regions, and thus avoiding large exposures to single economies. Finally, we encourage you to schedule a meeting with your investment advisor to re-assess your investment objective and risk profile and recommend any portfolio changes as required.

This round-up is not intended to constitute an offer or agreement to buy or sell, and investments referred to in this document may not be suitable for every investor. The company or any connected company, their clients, officers and employees are likely to have an interest in securities mentioned in this round-up. Past performance is no guide to future performance and the value of investments may fall as well as rise.