“There are those of a more bearish mindset who suggest we are beginning to witness the end of the cycle but we believe that their pessimism is currently misplaced. Fundamentals appear sound and there is little in the way of warning signals to suggest an imminent and significant deterioration in growth.”
Rosey Hurst, Responsible Investment Advisory Council
That situation has changed and in the first three months of 2018 the strength and longevity of the synchronised global economic expansion was increasingly called into question. Despite growth remaining robust in absolute terms, the combination of weaker momentum, higher inflation (in the US) and resulting interest rate rises led to market weakness and a return to more ‘normal’ levels of volatility. While risks have certainly risen we didn’t (and still don’t) view a rise in volatility and choppier markets as indicative of fundamental problems and are comforted that the heightened volatility has not, so far, extended beyond equity markets.
It is important to put recent moves into context, and the situation in Europe illustrates this point. Like elsewhere, Europe enjoyed a year of positive economic surprises in 2017 but so far in 2018 we have seen that trend reverse. In our view, this does not represent a significant setback in terms of actual growth or prospects for expansion but is a function of the fact that expectations had previously become somewhat too optimistic.
The US economy, meanwhile, continues to deliver, with growth expectations being revised upwards. For now at least, it appears to have regained its role as global growth leader. Undoubtedly there are some US specific concerns including regulatory concerns on the technology sector and trade tensions. These, together with the prospect of higher interest rates, have kept a lid on returns from US equities.
There are those of a more bearish mindset who suggest we are beginning to witness the end of the cycle but we believe that their pessimism is currently misplaced. Fundamentals appear sound and there is little in the way of warning signals to suggest an imminent and significant deterioration in growth. The US yield curve has flattened somewhat but we have not seen it invert, which often occurs ahead of a sustained downturn. From a valuation perspective, the first quarter’s weakness means that US share prices (where most recent valuation concerns have been centred) are trading around the average forward multiple of the last 30 years. Equity markets are certainly not cheap but, with fundamentals still supportive, and despite rising rates, there still appears some scope for further progress.