Markets may be 'right to be cautious' — despite Korean developments and strong earnings

  • Earnings season stateside has seen robust results, but markets have had weak momentum, said Mikio Kumada of LGT Capital Partners.
  • Investors were right to be cautious even amid positive geopolitical developments on the Korean Peninsula, he added.

Robust first-quarter earnings stateside and seemingly favorable developments on the Korean Peninsula last week may have painted a rosy picture ahead for markets, but staying cautious could prove to be a smart move for investors.

"Our base case is fairly positive, but still, the fact is that we are seeing markets have relatively weak momentum," Mikio Kumada, executive director and global strategist at LGT Capital Partners, told CNBC's "Capital Connection."

"Even though we have strong earnings, the market is not gaining momentum and we have some of the economic data in the U.S., as well as Europe, being still positive, but showing some slowdown. So that suggests the market is a little bit skeptical," he added.

This earnings season has been robust, with close to 80 percent of the 276 S&P 500 companies that had reported as of Friday topping analyst expectations, according to Thomson Reuters I/B/E/S. Earnings in the first quarter are projected to rise 24.6 percent compared to a year ago.

Largely upbeat earnings releases have buoyed U.S. stocks, although markets stateside finished little changed on Friday.

"This is a tricky phase, where the sentiment, because of the trade war, affected the markets, and the markets may start to affect the real economy, so I think a little bit of caution is warranted here," Kumada said.

Markets 'right to be cautious'

Amid fading geopolitical tensions on the back of a historic bilateral meeting between South Korean President Moon Jae-in and North Korean leader Kim Jong Un last week, Kumada pointed out that uncertainty could remain.

"Denuclearization is easier said than done. I think the market is right to be cautious here, even though this is a very positive development that opens up a lot of new opportunities as well," he added.

And while there had been "lots of presidents holding hands" in the previous week, Kumada said, alluding to the inter-Korea summit and French President Emmanuel Macron's visit to Washington, the recent easing in tensions had come on the back of an escalation in geopolitical rhetoric.

"I think the market is basically pricing in a higher level of uncertainty in possible outcomes," he said.

"The outcomes could be very good, such as permanent peace and denuclearization in an agreement on North Korea, or they could also be very bad, such as going back to the belligerent situation that we had before," Kumada added.

Given sources of uncertainty in the markets, Kumada said he had a "very high cash quota," but also remained slightly overweight on equities.