Global equities rebounded sharply in the first quarter from the sell-off in late 2018. But conditions remain shaky and caution is warranted. Investors should pay close attention to policy-related risks when considering their allocations.

During the quarter, the MSCI World Index advanced by 12.6% in local currency terms. Stocks rose across regions and sectors, with developed markets led by US and European equities (Display). Gains of Chinese stocks dwarfed other regions, in a rapid snapback from steep declines in 2018. Cyclical stocks, led by technology, were the strongest performers, while financials trailed the broader market. Although growth and high-beta stocks did well, other quantitative equity factors such as momentum, value and quality underperformed.

Rate Concerns Fade, but Volatility Persists

So why did stocks rebound so sharply? In our view, much of the improved sentiment was driven by expectations of monetary policy. It’s clear now that the US Federal Reserve and European Central Bank aren’t about to put the brakes on by tightening monetary policy anytime soon. In addition, last year’s downturn reflected fears that some of the biggest challenges to the market would culminate in bad outcomes. The recovery suggests that investors felt the drawdown had gone too far. Now, global equities have nearly come full circle, and valuations are back close to similar levels seen at the end of September.

Despite the rebound, plenty of concerns remain unresolved. In late March, the inversion of part of the US yield curve and weakening European economic indicators added to anxieties about the global economy. China’s slowdown, trade wars and Brexit are still casting a shadow over markets.