Investment market update - Investing in equities - why we remain positive
At the start of this year we predicted 2018 to be bumpier than 2017, (which could scarcely have been smoother, with volatility measures at all-time lows during the year), and so it is proving. However, we also thought that the investment climate would still be favourable for risk assets like shares (or equities/stocks). We based this view on robust economic growth across the globe, a boost to earnings from US tax reform, rising corporate profits and the continuing gift from central banks of decent liquidity, even with quantitative tightening from the Federal Reserve, and very low, albeit slightly rising interest rates.
Has anything changed recently to influence our view on equities?
Global growth - there has been a slew of leading and economic indicators that suggest a slight deceleration in the rate of global growth (potentially negative for equities). However, this is despite a tight labour market in the US, UK, Germany and Japan, and some evidence of increasing wages as a result.
- US fiscal stimulus - in addition to the tax cuts passed at the end of 2017, US congress has passed a budget that provides more than US$1tn of additional government spending over the next ten years. This should reinforce domestic growth and benefit US equities/companies, but somewhat undermines US government bond prices due to increased supply.
- Brexit progress - closer to home, there has been clear progress in Brexit negotiations. This has helped to lift some uncertainty surrounding sterling, which has rallied strongly, particularly against a weak US dollar.
- Technology’s fall from grace - the combination of Facebook’s data woes and Trump’s attack on Amazon introduced a huge amount of volatility into the previously flying technology sector.
- Company earnings - results are strong, especially in the banking and resources sectors.
Putting all these factors together, we are comfortable that equities remain our favoured asset class. Even valuations on shares, which had been a slight worry - most particularly in the US - have faded from our concerns. In fact, equity valuations look attractive in emerging markets and Japan. Meanwhile, upward pressure on bonds remains likely in aggregate as growth and policy normalisation means more interest rate increases.
What’s more, the wobble we have seen since early February looks like a classic mid-bull market correction, from which we appear to be recovering in text-book fashion. It was driven by two factors: stronger-than expected inflation readings in the US, which prompted some worries about the trajectory of interest rates there, and more recently, President Trump’s developing trade spat, mainly with China.
As we note above, 2017 was extraordinary for the smoothness of equity returns and lacking volatility. Looking forward to the remainder of 2018 we expect us to revert, not to the ‘new normal’, but to the ‘old normal’ of market gains being punctuated with periods of volatility. With trade friction, rising interest rates and the threat of regulatory action in the technology sector, there are going to be plenty of triggers for bouts of nervousness. At the moment, however, the weight of economic and corporate momentum indicates there is still room for upside in equities.
The goldilocks economy – not too hot and not too cold – will be with us for some time longer, in our view.
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IMPORTANT: Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.