Equity markets continued to perform well for March and the MSCI All Countries Index rose 11.6% for the quarter.

• US economy continues to show signs of slowing, but importantly, the slowdown does not seem to be accelerating, and with a more dovish Fed, equity markets continued to perform well, with MSCI All Countries Index up over 1% for March.
• US Treasury yields, despite positive equity market moves, continued falling, reaching yields last seen in late 2017. Global bonds followed suit, and the FTSE World Govt Bond Index rose over 1.2%.
• US economic performance continues to outshine the rest of the world, and hence US dollar, despite high valuations, trended sideways.
• US-China trade talks continue, but little progress made – a risk for markets, whilst the Brexit developments continue to be a risk for Eurocentric markets.

Market update

The extreme pessimism of November and December 2018 seems to have vanished completely, as equity markets rounded out a perfect quarter of positive months by end-March, with the MSCI All Countries Index having risen 11.6% in the quarter, after having fallen 13% in Q4 2018. 

Current sentiment is related to the US economy still showing signs of slowing, but certainly not slowing to the extent that a recession is on the cards. Added to the mix is a US Federal Reserve (the Fed) that is distinctly more dovish than was the case in December. A moderation is the best way to describe the current dynamic. 

Normally, given the current market sentiment one would expect the US dollar to weaken somewhat, but the fact that despite a yield curve that inverted for a short period (US 10-year yields lower than 3 month yields), the US economy is in better shape than most of the other major economies.  As such then US dollar, despite elevated valuations, trended sideways against other major crosses. The Japanese yen though was the best performing major, displaying its defensive properties.

Adding positive sentiment was the rebound in the China Manufacturing PMI number – rising to above 50 after hitting the lowest levels in three years the previous month.  Concerns about the China economy remain though and markets await further stimulus measures from the PBOC going forward.  

The more positive market sentiment was reflected in rising commodity prices, with the CRB Raw Industrials Index rising over 1.5% in March. 

Portfolio strategy

Given positive market performance, we are slightly overweight equity against benchmarks, and with hindsight we were correct in our earlier assessment that the markets were over-reacting in December. After assessing market conditions we are comfortable with current positioning and did not make any dramatic shifts.

Given the positive run on oil prices we have closed out our thematic energy trade, and invested those proceeds into opening a position on Canadian equities as well as increasing US exposure. Our overall weight to EM space remains, but on alert to lock profits at the appropriate time.