Are global trade tensions and the difficulties facing some emerging markets likely to affect economic growth and company profits?
We haven’t made any changes to our outlook over the past month and we continue to prefer equities to bonds. In particular, we are pessimistic about the prospective returns from corporate bonds. This view is based on our outlook for corporate profits growth, which should remain strong and therefore support share prices.
However, many investors across the world do not share this view and are currently preoccupied with global trade tensions and the difficulties faced by some emerging market economies. There are worries that both factors will affect global economic growth and company profits, should these escalate.
It is reasonable to expect some slowdown in the pace of economic growth and company profits. Interest rate rises in the US make borrowing more expensive for companies and consumers, thereby slowing economic growth. But it is important to stress that the global economy and company profits will still grow, just at a slower pace, which should still boost share prices.
It might seem counterintuitive, but surveys of investor sentiment indicate that they are pessimistic about returns from equities in the coming months. When investors think the economy is doing well, they often prefer investments that benefit from growth, such as equities. But when investors expect growth to falter, investments that are perceived as being safer, such as bonds, prove more popular.
We do not share this pessimism and believe that the recent falls in share prices made them less expensive and, in our opinion, more likely to rise in value in the future.
There has been a large divergence in the performance of share prices over the past year. The US stock market has returned nearly 20%, while European, UK and many markets in Asia have only risen by around 5%. The question is how long can this continue?
It seems likely that at some point the laggards will catch up, as European and Asian economies are not that far behind the US. In particular, we believe there are companies in Europe, Japan and the emerging markets that are growing profits strongly, but whose share prices are inexpensive and could rise to reflect the companies’ true value.
Rising US interest rates have contributed to our negative outlook for bonds. Most bonds make a fixed payment to investors, regardless of changes in the underlying interest rates. Therefore, when the rate of interest available on cash goes up, bonds look comparatively less attractive.
We are particularly negative on the outlook for European bonds, as yields are very low in some countries. In Germany for example, the government bond yield is close to zero. We also believe that corporate bonds (those issued by companies) in most countries are expensive and offer limited returns.
The outlook for property is mixed. On one hand, warehouses and distribution centres are much sought after, particularly by companies with e-commerce operations, but demand for high-street retail properties is very weak. There is strong demand for UK commercial property from overseas investors, who are finding it cheaper to buy property following the fall in the value of the pound against other major global currencies.
Forecasts of future performance are not a reliable guide to actual results in the future, neither is past performance a reliable guide to future performance. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed. Any views expressed are our in-house views at September 2018. Investment markets and conditions can change rapidly and the views expressed should not be taken as statements of fact nor relied upon when making investment decisions. This information may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.
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