Global equity markets hit all-time highs in November, while leading global economic institutions now see an improving growth picture ahead – with the notable exception of the UK. So are markets really invincible?
Reviving business investment, the lowest unemployment in decades and strong consumer sentiment and spending are providing potent fuel for corporate earnings growth expectations. In equity markets, the mid-November dip proved only temporary, as previously reluctant investors jumped onto the market bandwagon. Many had been holding back through fears that equity growth was insufficiently backed up by the real economy, but the recent overwhelmingly positive quarterly earnings figures apparently convinced investors otherwise.
We believe the global economic outlook is indeed positive, but not quite as bright as current market dynamics imply. Extended equity valuations in the US are of particular concern, making it vulnerable to even a modest headwind. Unfortunately, even though Europe and Asia still have upside potential, a US sell-off could well spread across the globe as investors get spooked.
Right now, we don’t see any huge threats on the horizon. But over the coming three to six months, slowing US economic and credit growth, as well as slowing Chinese activity, could lead to a market correction. And in the longer term, rising interest rates could lower activity.
This isn’t to say we’re bearish, just cautious. For the time being, returning business positivity should provide a supportive environment for investment returns. But our wariness of volatility means we’re opting to continue with our current investment strategy: keeping the equity/ bond balance roughly in line with risk profile guidelines, and using an active regional and currency position. This should account for the cyclical differences across different regions.
