H1/19: What Worked, and What Didn’t

We’re now halfway through 2019, so it’s time to look back at H1 and assess which investment themes, styles and asset classes worked and which ones didn’t. It has been a powerful market year in most geographic areas, particularly in the United States. US large caps, as represented by the S&P 500, advanced 18.5 per cent. The first half was punctuated by the S&P’s best June showing since 1938. The S&P was the best 6-month performer among major asset classes, fueled largely by a 27 per cent surge in technology shares. Discretionary and Industrials, the sectors most sensitive to economic growth, each gained more than 21 per cent. Health care, up 8 per cent, was the sector laggard. US small caps, meanwhile, delivered 17 per cent, helped by a similar surge in technology stocks.  Overseas markets generally trailed the US even though the dollar was flat during H1. Developed markets expanded 14.5 per cent, with all constituent countries gaining ground. Greece led the pack, up an astounding 31.6 per cent year to date, while Austria was in last place with a 6.9 per cent gain.

European exposure also helped emerging market investors. Even though EM grew 10.7 per cent, EM Eastern Europe expanded more than 22 per cent year to date. Russia surged 33.5 per cent. China, representing more than one-quarter of the MSCI Emerging Market Index, advanced 13.1 per cent, despite its trade battle with the US.

Closer to home, among domestic styles, value investing has trailed momentum, quality and small by more than 5 percentage points so far this year, as the “risk-on” mentality enveloped investors. Value aversion can be seen within the S&P 500, where the 100 stocks with the highest price-earnings ratios have outpaced the cheapest 100 stocks by delivering 27.7 per cent vs 11.1 per cent; a similar trend is also seen in price-to-cash-flow and dividend yield terms. Non-yielders in the S&P outperformed the highest-yielding quintile of stocks 24.3 per cent vs 11.1 per cent.

Sliding into earnings season, analysts anticipate S&P 500 profits to be 2.5 per cent lower year on year in Q2/19. Profit growth is expected to pick up through the rest of the year. If companies outpace expectations – as they pulled off in Q1/19 – we expect profit growth to be positive for Q2. Stronger estimates for H2 should help power stocks higher, albeit at a slower trajectory, through the rest of 2019.

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