Weekly Digest - INVESTEC
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Given recent market weakness, I hope it is helpful to share a summary of our investment view.
Independent of politics, the prospects for global growth, corporate profits & interest rates support outperformance of risk assets over insurance assets, in our opinion. Our central case is that investor complacency has now evaporated and fears of either economic (monetary policy) or geo-political miss-steps (Donald Trump) will bring the earnings growth cycle to an imminent end are now overdone. We see a still supportive economic backdrop, with improved valuations particularly in Emerging Markets increasing our confidence that owning risk assets will be rewarded relative to owning cash or fixed income over the medium term.
• We retain a positive view on the outlook for growth in the global economy and hence for corporate profits
• We think concerns are now overdone. 2019 should see growth convergence generating similar overall global economic growth to 2018. Specifically, the US economy will slow somewhat as the stimulus of tax-cuts is not repeated, but Europe and the Emerging economies are expected to improve, helped by easier monetary conditions (as Dollar strength abates), better terms of trade (the effect of previous Dollar strength), lower oil prices and an improving political backdrop
• Corporate profits growth close to mid-single digits percentage increases, so lower levels than in 2018, but still positive and therefore supportive to equities, which are not overvalued in this scenario
• Monetary Policy Transition Risks Are Low: Markets have been given ample time to adjust to the fact that America is committed to normalising its monetary policy stance and investors are now also aware that Europe has embarked on the same course
• Valuations of risk assets are attractive. Although discount rates have risen this year the picture is now improved as the rise in interest rates has been more than offset by a combination of growth and, outside the US, by material equity market declines
Given the above, why are we not more aggressively positively positioning portfolios now? Whilst we are considering opportunities for appropriate portfolios, particular risks we are wary of include:
1) Cyclical risk: We are inclined to be less forgiving on equity valuations than usual as the cycle is certainly maturing. If inflation pressures do start to build beyond the level factored into markets, economic “good news” can soon become “bad news” for risk assets
2) Elevated Specific Geo-Political Risks: Currently we are explicitly making three key judgements:
a. America and China can reach an accommodation on trade
b. Whilst the situation with America is unresolved, China, the nexus of the wider Emerging Market growth story and an important trading partner for Europe too, will continue to grow solidly
c. Europe will prove resilient to resurgent populism embodied in German elections, Italian challenges, French unrest and also to Brexit, whatever form it should take
3) A New World Dis-Order: the current US Administration’s use of deliberately engineered crises to achieve policy ends is now an established pattern. Corporate confidence is a hostage in this process. Whether or not American objectives are laudable (and many support a robust stance on China), there is an increasing probability that this method will backfire. A “Trump Tariff” in risk assets is justified