Set out below is the latest update from one of our research partners, Ineichen Research & Management (IR&M) as at 21 February 2019.

 

Observations
The main message from Ineichen this month is that 2019 looks more like (post February) 2018 than 2017 so far. The 2019 rise in risky assets is almost purely Fed-U-turn driven. The U-turn itself was triggered by mounting negative economic data points.

 

The key take outs from this month are:

• Overall changes in this update were positively biased.

Over the past five updates the positive-negative change ratio was 20:41, i.e., a negative bias. Only 39% of regime tests were positive, similar to last update and close to low.

• Economic momentum remains worsening. However, business sentiment stopped falling in January and February and consumer sentiment rose in February.
• Earnings momentum remains worsening. Downward revisions are mild though.
• GDP growth and Industrial production remain falling
• Risk: Deflation is back. CPI and PPI remain falling

 

The table below summarises the IR&M economic models, macro surprises, earnings and IR&M’s perceived economic trend and some technical stock market trend indicators. Changes vs last month are circled.

 

Looking at each of the factors, broadly from left to right, the first five columns set out IR&M’s interpretation of various recent economic data released in those counties and whether it is generally improving or deteriorating. The EPS change column in the middle is a very important indicator of whether profits estimates for the next year are rising or falling. The final three columns look at the momentum (or technicals) in the various global share markets.

 

The Risks?

Over the month the sum of ticks dropped. The primary change was the Japanese long-term price momentum of the Yen, rising.

January 2019 bottom line tally:

 

 

What about Australia?
According to Ineichen’s data:

• Economic momentum remains worsening.
• Macro surprises have been negative since early December.
• Earnings estimates have changed materially for Materials being strongly revised upwards
• Long term price momentum for the two composite indices remains negative, however turned positive for metals and mining.

 

 

Points of Interest–

This month Ineichen looked at the CBOE Volatility Index (VIX). The VIX Index is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options (futures).

It is a measure of expected future volatility and is commonly referred to as the fear index or the fear gauge.

 

 

 

Source: Ineichen Research & Management
IR&M is one of several research sources that guide our investment decision making. They are Swiss based and provide a detailed global view of the many drivers of investment markets. Like us, they believe that in the long run investment returns are driven by the fundamentals (the prices today will ultimately revert to what various things fundamentally ought to be worth) but in the short term may be driven more by sentiment and momentum (otherwise known as “technical” signals).