Is global economic expansion on the cards?
At the start of 2017, it was unlikely many investors would have been preparing for an environment of global economic expansion.
The political outlook was not only uncertain but with the inauguration of President Trump in the US, protectionist policies seemed to be back on the agenda.
Now, just beyond the halfway point in the year, things are looking slightly different.
Admittedly, the UK government is still focused on negotiating the country’s exit from the EU, which has been identified as a potential headwind for UK economic growth.
UK GDP grew by 0.3 per cent in the second quarter of 2017 but the first six months of this year have now provided the slowest economic growth since 2013.
Expansion not contraction
But elsewhere around the world, there are signs in both developed and emerging markets of economic growth.
Richard Turnill, global chief investment strategist at BlackRock, explains one of BlackRock’s themes for the second half of the year is sustained expansion.
“The BlackRock GPS signal points to further upside surprise to consensus growth expectations in all major regions around the world. Indeed we see growth broadening out from being consumer led to increasingly seeing investment recovery as well,” he notes.
“Moreover we believe we’re in the middle of a long cycle. Although the cycle is already eight years old, it’s showing very few signs of old age. In particular we see no significant pick-up in inflation and as yet wage growth remaining well behaved.”
The asset manager believes this means the time to the next recession should be measured in years, rather than quarters.
Certainly, the UK's CPI rate of inflation fell back to 2.6 per cent in June, having reached 2.9 per cent in May in the UK.
The Bank of England now expects inflation to peak at 3 per cent in October this year.
Mr Turnill’s optimism about global growth is not felt by all.
Indeed, the IMF has downgraded the growth expectations of both the UK and US economies for this year.
Chris Ralph, chief investment officer at St. James's Place Wealth Management says: “Although its forecast for UK growth in 2018 was unchanged, the IMF predicted that US growth next year would now be 2.1 per cent, instead of the 2.5 per cent previously forecast.”
He adds: “The IMF said that better growth in China, the eurozone and Japan was making up for a slower-than-expected US economy. Christine Lagarde, IMF managing director, pointed to how sources of growth had diversified from the US.
“Emerging and developing economies now account for 60 per cent of global GDP and 80 per cent of growth.”
Investors are split over where the US is in its current economic cycle.
If it is the case the outlook is for global economic expansion, then what exactly does this mean for investors?
Mr Turnill suggests: “In terms of bonds, it means a gradual rise in interest rates over time as central banks normalise extremely loose monetary policy.
“In terms of equities, sustained expansion creates a positive environment for investing; one in which we expect equities to generate positive returns over time, and in particular where we see opportunities in value stocks such as banks, which will benefit from gradually steepening yield curves, and also momentum stocks such as technology, which will benefit from the period of sustained economic growth.”
Equities under scrutiny
However, Alastair George, chief strategist at Edison Investment Research believes the bull case for equities is increasingly based on what he calls “a single Goldilocks scenario”.
“In other words, if equity valuations remain as high as they are; and the global economy continues to slowly expand; and profit margins remain at record levels; and monetary policy remains accommodative; and volatility remains low then investors will have no alternative but to drive equity prices higher,” he explains.
He takes the view investors should maintain a cautious position.
Of course, it is entirely possible all of these scenarios will come true, and in that case investors will want to have an allocation to equities.
At the same time, many believe the bull market in bonds is coming to an end.
Chris Godding, chief investment officer at Tilney, believes: “While there are clear signs of euphoria in parts of the market, notably technology, which has been a key factor in driving US equity multiples to the upper end of historic trend, valuations do not look excessive for most regions compared to long-term trends and are actually quite compelling for Asian and emerging market equities.
“The step up in bond yields at the end of June has had a knock-on impact, with a decent correction in consumer staples which had been trading on very high multiples and interest rate sensitive stocks such as utilities, real estate and telecoms.”
Diversification is likely to be a useful strategy, whether that means through single funds across asset classes, or by allocating to a multi-asset or absolute return fund.
Mr Godding reasons: “We therefore see an environment where the risk/return trade-off for sovereign bonds is poor and investors looking for lower risk assets in a portfolio might instead use absolute return funds with low volatility strategies. We are more constructive on equities and less concerned about current valuations than some other investors.”
Mr Turnill warns investors against playing it too safe, too soon.
“If growth persists for some time and valuations on stocks are more reasonable than historical averages suggest, the biggest danger investors face may be a premature flight to safety. Indeed, we believe the old adage holds: make hay while the sun is shining.”
Ellie Duncan is deputy content plus editor at FTAdviser
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