Equity markets remained on very solid footing throughout April. US equities even recouped their historical highs by the end of the month.
Equity markets remained on very solid footing throughout April. US equities even recouped their historical highs by the end of the month. May, however, was marred by a renewed bout of volatility.
Taking a step back, the strong recovery in risk appetite since the start of the year can be traced back to three elements: (1) the dovish U-turn from major world central banks (2) broadly reassuring economic data and solid corporate earnings (3) fading political risks (Brexit, trade war, etc.). Yet, just as the US and China seemed to be on the cusp of finalizing a trade agreement, a rift emerged, leading President Trump to implement 25% tariffs on an additional $200bn of Chinese exports.
While central banks will probably remain dovish, renewed trade-war related uncertainties could have a negative impact on economic activity should the situation last or tensions worsen. Two of the three pillars that have supported financial markets since the start of the year would thus be left in a fragile state. Even though the US and China have a common interest in coming to terms, the probability of a rapid resolution now seems quite low.
In a context of strong multiple expansion since the start of the year, short-term downside risks now seem to prevail. This leads us to implement hedges and/or take profit on trades which have significantly contributed to positive performance in our portfolios.