As usual it’s the political issues rather than the fundamental economic conditions that are influencing sentiment at present.
In recent days Italy’s political instability has made headlines and the on-again off-again US/ Nth Korea talks and US-versus-The World tariff manoeuvres are giving those players in the share markets who are looking for excuses to exit some things to think about. This could be seen during May where most of the major markets around the world were up and down throughout but with a net flat result. Still, the major global financial markets have climbed back to historic highs – or close to it – since the GFC. Is this something that can be expected to continue?
Each of the fund managers and portfolio analysts we met with during May (Ausbil, Perpetual, Fidelity, Franklin Templeton, State Street Global) told the same story of sound, and indeed strengthening, economic conditions around the world. Ausbil was probably the most upbeat noting that economic growth in the US in particular was in fact accelerating, with earlier IMF forecasts for 2018 of 1.8% more likely to land between 2.7% and 3%. They highlighted as well that some of the Trump administration policies have fuelled business confidence significantly which can be seen in the highest readings for intended business investment – capital expenditure/’Capex’ – since the Reagan years in the early 1980’s. See Chart below.
All of them still held the view that Central Banks lifting their interest rates too quickly was probably the main risk but the consensus view was that inflation is “not breakout”. Fidelity Investments voiced an additional, relatively minor concern about the state of the housing market in Australia and the damage a dramatic correction might do to our share market but felt that triggers for either of these concerns were longer term if anything.
Franklin Templeton was probably the most pessimistic with their Global head of investments seeing signals for corrections in all asset classes – shares, bonds – at some point in the future given interest rate pressures and the unwinding of positions that have been built largely through Central bank interventions over the years. But he was quick to stress that such an outcome was neither imminent nor guaranteed and was dependent upon numerous things that could happen between now and then.
In essence, another way of saying that they all expect greater levels of volatility. This in itself is not surprising given the low levels of volatility in recent years as evidenced in the VIX Chart we often refer to in this newsletter which has often been referred to as a sign of investor complacency in recent times.
So with all of this uncertainty what are we supposed to do?
The answer is to maintain our disciplines and continue to invest for purpose. For those clients in the younger age brackets a greater exposure to high-quality shares remains an appropriate starting point for the conversation while for those closer to, or in, retirement a prudent and appropriate mix of asset classes typically forms the backbone of superannuation and retirement income portfolios.
We are pretty certain of a few things: (i) not many people can afford to put all of their money in cash because most of us need to earn a decent return which means we need some exposures to bonds, shares, and the like; (ii) volatility presents opportunities – it is during volatile times that investors/investment managers can make their most astute decisions, picking up high-quality stocks that are all of a sudden much cheaper; and (iii) things continuously change and evolve so we are mindful of having client money placed with high-quality managers who stick to rigourous research processes and are able to adapt where possible as the landscape changes.
As always, feel free to contact us with queries or concerns. And remember to regularly review not only your investment or super portfolio but also your broader circumstances, goals, priorities.
Chart 1: Businesses in the US are optimistic. Their plans to invest into their businesses are the highest they’ve been since Reagan – see the red circles.
Chart 2: After the obvious destruction of the GFC and significant problems in 2012/13 the Eurozone countries are back in business.
Sources: RBA, Ausbil, Bloomberg, Fidelity, Perpetual, Franklin Templeton.