I regularly attend investment seminars for IFAs run by Invesco Perpetual called “Investment Intelligence.” In a presentation last week the speaker reviewed the global economy and markets and addressed the issue of the US Federal Reserve unwinding its Quantitative Easing or QE programme. As you are aware central banks in the USA, UK, EU and Japan have undertaken considerable asset purchases since the financial crisis to support the economy and their balance sheets have ballooned. The unwinding of QE called Quantitative Tightening or QT should not be confused with tapering. The latter is the reduction in QE purchases – the European Central Bank (ECB) will begin to do this in January 2018 whilst QT is the next step i.e. the disposal of assets that central banks have acquired. This has to be done carefully and slowly as wholesale dumping of bonds onto the market could trigger a collapse in prices. Instead in the US is as bonds mature there will be a reduction in the amounts re-invested by the Federal Reserve. Whatever the methods deployed and stages that different economies are at, tapering and QT are both clearly signs of recovery in the global economy.
This conclusion was a key message from the seminar. A recent OECD (The Organisation for Economic Co-operation and Development) study showed broad based economic recovery in all 45 countries surveyed with many exceeding forecasts. Whilst global equities have been the best performing asset in 2017, emerging market equities have outperformed. This is a reversal of a five trend of declines compared to developed market equities, a whopping 50% in relative returns. Improved fundamentals and a weaker US dollar have contributed to the turnaround. In summary the bull market in equities could continue as economic growth is anaemic and central bank policy is accommodative. The speaker observed that bull markets don’t die of old age, a phrase that is clearly catching on, and he cited Australia which has not had a recession for 26 years. The message I am hearing from various investment companies is we have a Goldilocks economy, even if that phrase is not used – one that is not too hot and not too cold.
In the UK, Invesco’s view is that inflationary pressures are easing. Technology is keeping down prices although unsecured consumer debt, for example car financing is a concern. Brexit considerations will of course be a key factor for the UK economy as markets hate uncertainty. Surprisingly UK larger companies have underperformed smaller ones despite the tail wind of a weaker pound which boosts the value of overseas earnings. This is because 60% of overseas earnings are derived from the US and the $ has fallen against the £ in 2017. In another presentation by Prudential I listened to last week the lack of dividend cover and profits warnings from FTSE 350 companies was highlighted. Dividend cover is the ratio of earnings to dividends. If too high a level of earnings is paid out to shareholders it can leave companies financial vulnerable and shareholders at risk of future dividend cuts.
Other takeaways were very high asset correlations and very low volatility. Gold however may be a hedge against equity market falls and can play a useful role in a portfolio. Whilst there are political risks overall the back drop for the global economy is benign. I have no truck with this analysis but I have said on various occasions previously stock market crashes may be triggered not by deteriorating economic fundamentals but irrational investor psychology. Caution remains the order of the day for me.
The content of this blog is my own understanding of the global economy and stock markets. My comments are intended as general commentary only. Nothing in this article should be construed as personal investment advice, including to buy gold. You should seek individual advice based on your own financial circumstances before making investment decisions.