Navigating New Global Market Uncertainties
Global equity markets continued to face uncertainties during the third quarter of this year, but by and large, they remained resilient. Templeton Global Equity Group’s Tony Docal, Peter Moeschter and Heather Waddell provide an overview of events shaping markets in the third quarter and share their outlook for global equities. They explain their preference for multinational companies in the United Kingdom, why they see downside risk as limited in Europe versus the United States and why they still see a case for value investing.
Quarter in Review
In the third quarter of 2019, global equity markets were slightly positive, but markets outside the United States generally declined for a number of reasons. These included concerns about the progress of US-China trade talks, a continued lack of clarity on Brexit and an escalation of conflicts in the Middle East. On the economic front, the headlines were mostly negative, with global data that pointed to continuing economic slowdowns and, in particular, manufacturing weakness. Virtually the only positive headlines came from the global central banks that continued to cut interest rates and deliver accommodative guidance.
Volatility flared up periodically during the quarter on the back of the latest tweet or headline. Equity markets in Japan and the United States rose during the quarter, while markets elsewhere in Asia and Europe were generally weak. Because of the US strength and weight, developed markets were up 0.7% while emerging markets fell more than 4%1 as Chinese equities suffered amid escalating trade tensions.
Two defensive sectors, consumer staples and utilities, were the strongest during the quarter, given all the geopolitical and macro uncertainties. Perhaps not surprisingly, cyclical sectors, energy and materials, were the greatest laggards.
In an environment of slowing economic growth and rising risks, investors have been willing to pay a premium for growth and safety. The safety premium is evident in the outperformance of bond proxies like staples and utilities. Cyclicals are simply the inverse of this theme; cyclicals depend on improving macro conditions, and these types of stocks have generally been out of favor this late in the economic cycle as risks are rising.
We view sector opportunities as very highly selective. In our view, the extreme crowding and positioning in bond proxy sectors (as mentioned above) increases the likelihood of a sharp and severe rotation out of defensives into cyclicals. However, sustainable longer-term cyclical performance would likely require a durable improvement in macroeconomic conditions and a de-escalation of the political risks we see today globally.