The first quarter of 2019 is ending with modestly bullish performances led by Chinese equities (up 5.53%), with slower growth in developed markets including the US (1.79%) and EU (1.69%). The main factor supporting risky assets in recent months has been improving prospects for US-China trade talks, with the two sides now closer to a "realistic deal".
As well, equity investors have taken heart from US Federal Reserve statements suggesting it is finished with interest-rate increases, and will also pare back the size of planned reductions in its balance sheet.
However, the newly dovish Fed and soft inflation outlook have been blamed for a negative yield spread between 10-year and 3-month US treasuries. This partially inverted yield curve, seen as a harbinger of recession, caused jitters in the markets before the focus returned to the trade talks and corporate results.
The Thai stock market, meanwhile, continues to lag most of its peers in light of the March 24 election results, which portend a shaky and possibly short-lived coalition. Domestic and foreign investors are holding cash and not increasing their exposure to Thai equities for two reasons. The first is uncertainty about who will form the government. The second is the imminent arrival of the long Songkran holiday, which pressures stock market liquidity. We expect the SET index to move in a narrow range between 1,620 and 1,680 in the near term.
What global issues should we focus on? Starting with the EU, we will focus on the European Parliament elections instead of the Brexit debate. Voters in 28 countries will be electing MEPs from May 23-26, with implications for the presidency of the European Commission over the next five years. The EC is responsible for drawing up proposals for new European legislation.
We think the European People's Party (EPP) will win the most seats in the election and will nominate Manfred Weber of Germany for the EC presidency. Some oppose his candidacy, but not enough to cause a stir or have much impact on the stock market.
In any case, we are still underweight European stocks despite attractive valuations and high EPS growth, as certain countries remain exposed to political risk, coupled with a slowdown in economic growth.
The Thai election is not the only political development of significance in Asia. In India, where five weeks of voting begin on April 11, we believe Narendra Modi remains the favourite to become prime minister again. However, his Bharatiya Janata Party (BJP) might fall short of its 2014 seat total because major regional parties are uniting against it. India is currently in a pre-election rally.
We maintain a neutral recommendation on the Indian stock market, due to the significant rise in five-year certificates of deposit resulting from political tension and a hawkish policy stance. However, the election outcome is not a huge factor, as we have seen that market reactions to adverse election outcomes tended to be short-lived in the past.
Therefore, the formation of a stable coalition government, its ability to expand the Indian economy and corporate earnings results will be the main drivers of the stock market in the long term, and we will turn bullish for a post-election rally play.
We still foresee great investment opportunities in risky assets, including equities. The strategies we recommend are based on countries that have cheap valuations with sustainable growth for 2019. We prefer equity to fixed income. We are interested in emerging-market equities like China and India, while our favourite developed market is Japan, with an optimistic outlook for a US-China trade deal.
We remain underweight in Thai equities, given the uncertainty about government formation. We will choose to invest in several different mutual funds, including property funds for portfolio diversification, in order to reduce risk from both domestic and international uncertainty, such as Brexit and political risk in Thailand.