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LGT Beacon: Staying the course after a very good start

February 21, 2019

The year-to-date risk rally is the strongest in a decade. The Federal Reserve's recent decision to pause, if not reverse, monetary tightening should help markets and inflation expectations to recover further. However, after having strategically raised our equity quota in December, we refrain from chasing prices higher. Instead, we rebalance equities back to neutral.

Strongest rebound in almost a decade

After a volatile quarter and a panic selloff in December, January brought relief to risk assets: US high yield credit rebounded to a new high, while the S&P 500 is on track to book the strongest two-month gain since fall 2010. The broad rebound in equities, initially led by the emerging markets (EM), has lifted the MSCI all-country index about 10% higher year-to-date.

The recovery is justified by economic fundamentals and a more benign monetary policy bias. At the same time, we are in a late-cycle environment and face some unusual risks of structural nature (deep political divisions within and amongst allied democracies, elevated populism and economic nationalism, Sino-American geostrategic rivalry, etc.). These risks cloud the longer-term outlook and favor prudent caution.

Nevertheless, some recent developments are clearly supportive for markets from a shorter-term, cyclical viewpoint, namely: 

  • Monetary policy has turned more dovish 
  • The cyclical macro data remains fairly constructive 
  • US earnings are strong and global valuations are modest
  • There are signs of progress on the trade front

Below, we take a closer look at each of the above points.

Against this background, we hope you will find LGT Capital Partners broader outlook insightful and invite you to share your views and ideas with us.

Specifically, we assess these five topics as follows: read on in the attachment by downloading the LGT Beacon

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Note: The next edition of the LGT Beacon is scheduled for mid March 2019.