Equity markets made further progress in March, but sector performance turned more cautious. Defensive and growth/quality stocks had a strong month but cyclicals and value underperformed.
The catalyst for the outperformance of defensive stocks in March was that month’s Federal Reserve meeting which, despite signalling no change to interest rates, adopted a more cautious tone. The bank lowered both growth and inflation forecasts for the current year and emphasised that it would be patient when determining what future adjustments to make to the target rate for Federal Funds. In response to this, the long end of the Treasury curve rallied and the yield curve became slightly inverted. The usefulness of an ‘inverted’ curve as a timing indicator is hotly debated but the Pavlovian response of investors was to sell cyclicals and buy defensives in anticipation of further economic weakness. This was exacerbated by the fall of German bund yields back below zero, dragged down by events in the US and more disappointing European data. As a consequence of these moves, the divergence in valuation between ‘value’ and ‘growth’ stocks again hit multi-year highs. Despite the recent move in bond yields we continue to believe that growth is stabilising and will rebound in the second half of the year driven by a resolution to Brexit, a US/China trade deal, and improvement in Emerging markets.
The interminably tedious process of Britain leaving the EU continued, with glacial progress being made towards some sort of resolution. Amid the never-ending Brexit saga investor positioning on UK assets remains generally cautious but noticeably less so than six months ago. Any resolution short of a no deal exit should see Sterling and domestic equities rally. In the meantime, the UK economy continues to prove resilient.