The research house said equity market gains from the recent ‘Trump trade’ – which saw shares rally and bonds sell off in the wake of US President Donald Trump’s election victory – had begun to weaken “as investors have reassessed the Trump administration’s ability to implement its economic agenda”.
US equities have stalled since around the middle of March, Morningstar said, though the earlier gains have put the S&P 500 up 4.9 per cent for the year to date.
“More positively, recent data suggest that the world economy is strengthening, which is supportive of growth assets,” Morningstar said.
The research house noted that the eurozone economy had seen an improvement and that emerging markets have “continued to outperform”, with the FTSE Eurofirst 300 index and the MSCI Emerging Markets index up 3.9 per cent and 7.8 per cent respectively for the year.
“The most recent survey data suggest that while the pace of growth in the US may have come off the boil, improved prospects elsewhere have helped the global economy to keep growing,” the research house said.
“Whatever temporary slowdown is occurring in the US has been counterbalanced by upturns elsewhere, particularly in the strengthening eurozone economy.”
A number of downside risks however remain, and Morningstar noted the International Monetary Fund had listed “protectionism, uncertainty around the US policy agenda, financial sector fragilities, potential setbacks to emerging markets, ongoing problems in the weaker eurozone countries and non-economic factors” as six primary challenges facing markets.
“Unfortunately, global equity markets appear to be putting a low probability on any of these risks materialising in a meaningful way,” Morningstar cautioned.
“Investors continue to pay high valuations by historical standards for equities, especially in the US, and the VIX [Chicago Board Options Exchange Volatility Index] measure of expected US share market volatility remains at unusually low levels, despite (for example) the unexpected US air strikes on Syria, which worsened US-Russia relations, or the current heightened tension over North Korea.”
Morningstar said the outlook was reasonably supportive of equity performance but that this remained susceptible “to reassessments of the value on offer and to risks materialising that investors do not currently seem to be prepared for”.