The first quarter saw global markets surge higher. Both global equities and fixed income posted strong results. Global equities as measured by the MSCI World Index returned a whopping 10.2%. While it is true that two important developments carried the headlines for the quarter – namely a positive tone to US/China relations and an undoubtedly more dovish US Federal Reserve – the strong results had more to do with the poor performance endured in the fourth quarter of last year. Oh, lest we forget and let sunnier times obscure the lessons learned.
The fourth quarter was in one word “emotional” and the havoc witnessed was very uncomfortable. With the benefit of the first quarter as our hindsight, however, we can see the importance of keeping calm and staying the course, focusing on our investment time horizon, and having confidence that volatility when it comes to an entire asset class is really just volatility and not risk per se. In a negative interest rate world, just to maintain the purchasing power of our assets we must be accepting of a higher allocation to global equities and their inherent volatility. Remember the first quarter of 2019. We will, without a doubt, be revisiting its lessons in the months ahead.
Looking to the quarters ahead there are three key observations guiding our investment outlook. Firstly, we see little upside in fixed income at this juncture and continue to be mesmerized by the control the world’s central bankers have over all points of the yield curve. Long as well as short. We contend that fixed income is no longer a free market and find little compelling reason to move from the broad market aggregate – save and except lowering our duration somewhat.
Secondly, with the S&P TSX Composite Index above 16,000 and S&P 500 2,800, we think both asset classes are at the top of their ranges. For North American stocks to trade higher, we feel new positive news is required. We don’t feel this way about international stocks. We believe that there is so much negativity baked into international equity valuations that the slightest turn in global trade and/or growth could attract significant capital flows to this asset class resulting in meaningful price appreciation.
Finally, after ten years of experimental monetary policy, inflation is nowhere to be found. Anxiety is building over this realization. Increasingly, we see policy pundits espousing Modern Monetary Theory (MMT) as a possible solution. Simply put, MMT calls for massive fiscal policy (infrastructure spending) paid for by newly printed money. Setting aside, for a moment, whether this is good idea or not – does it sell well in an election year? You bet. If, as we suspect, MMT picks-up momentum in the populist world that we live in, the impact will be seen in natural resources (particularly base metals) and value-oriented cyclical international equities.