Equity markets have roared back following the sharp correction at the end of 2018. The S&P 500 Index
had advanced 17% as of June 30, with every sector posting gains. The rally had a pro-cyclical component
to it as information technology, consumer discretionary and industrials delivered the strongest sector
returns while energy and health care were the laggards.
Looking ahead to the remainder of the year, we believe
equities face intensifying headwinds as the pace of global
growth slows and trade turmoil lingers. We examine how
these macro forces could impact 2019’s top performing
sectors to date: information technology, consumer
discretionary and industrials.
Information technology continues to be a key catalyst for
upward market activity, posting a 26% return for the first
half of the year. However, reported antitrust investigations
into four of the largest tech companies and ongoing
uncertainty about U.S.-China trade relations have led to an
uptick in volatility.
The U.S. government’s alleged antitrust violations at Apple,
Amazon, Facebook and Google-parent Alphabet could
create short-term implications for the sector. However, we
believe the result of this action won’t be known for months,
if not years. We don’t anticipate any short-term issues, so
we will assess the situation in a long-term context.
Trade turmoil triggered bouts of volatility for semiconductor
companies, particularly after the U.S. blacklisted Chinese
telecom giant Huawei in May, forbidding U.S. companies
from doing business with it. This action caused many
chip makers to lower their forecasts for the back half of
2019, while semiconductor end-users became increasingly
cautious with placing orders. However, those outlooks could
moderate after Trump indicated a reprieve of the ban could
be forthcoming as a result of talks at the G20 Summit.
We believe the emergence of secular growth opportunities,
such as the “Internet of Things” and 5G, could continue
to support the space.
Trade is also a concern for many consumer discretionary
companies. Luxury goods makers have largely avoided
incremental tariffs to date. However, further escalation of
levies of Chinese products would have a direct impact by
driving up the cost of goods sold for many discretionary
products. The indirect effect would likely be a drop
in demand as brands raise prices to offset tariffs and
consumer confidence could drop as a result.
We believe consumer discretionary companies with globally
diversified supply chains and revenue streams —and
therefore less dependent on China imports— could be better
positioned in the event of an escalation of the trade war.
Industrials have shown more resilience in 2019 after clear
underperformance last year amid rising trade fears and
ebbing economic stimulus. This improved performance
can be attributed partially to the fact that the sector was hit
harder by the initial rounds of tariffs last year. We believe the
sector could be in a position to better withstand the impact of
any incremental tariffs.
In addition, we believe there could be opportunities for
equities that are relatively unaffected by the trade situation,
particularly in the aerospace and defense sub-sectors, as well
as those that are likely to benefit from a resolution of the trade
war, such as multi-industrial and machinery companies.
Ivy Live: Ivy’s Midyear Outlook: Rates, risks and rallies
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The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current
through July 2019, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not
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