Great start to the year for the markets... but can it last?
All major stock market indices around the world have risen in value so far this year apart from India where the S&P BSE 100
is down 1.3%.
Russia’s Trading System index is top with an 11.2% gain and Brazil’s Bovespa index has advanced by 11.1%. The FTSE 250 is up 6.5% thanks to sterling strength and the more international-focused FTSE 100 has progressed by 1.2%.
By all rights this positive performance overall should put investors in a good mood, particularly after a miserable 2018. Sadly there are negative factors to consider.
Ann-Katrin Petersen, investment strategist at Allianz Global Investors, argues that we’ve already passed all the major turning points in the global macro environment. She says global economic momentum has peaked, so too central bank liquidity, global corporate profit growth and global fiscal stimulus.
This suggests you shouldn’t be complacent about equities and other asset classes delivering the kind of returns to which you might have become accustomed in the past decade.
One area to watch closely is the business cycle which describes the rise and fall in production output of goods and services in an economy. Business cycles tend to be measured using rise and fall in inflation-adjusted GDP, which includes output from the household and non-profit sector and the government sector, as well as business output.
‘As the business cycle matures, the global economy faces slower medium-term growth but there are no signs of an imminent recession yet,’ says Petersen. ‘The closer to the end of the business cycle, the bumpier ride for markets overall.’
The current US business cycle has been running for nearly twice as long as its historical average. The UK is even further ahead, running at 107 months versus a 48 month historical average. The eurozone is exactly in line with its average.
Although business cycles don’t die of old age, recent economic data has been disappointing in parts of the world, particularly in Europe. Fading global growth dynamics are typical in late cycle markets and it is in these circumstances that stock picking skills really matter. Inexperienced investors may therefore wish to rely upon the skills of fund managers in more volatile market conditions rather than go it alone.
Against this less rosy backdrop, it is interesting to hear Allianz Global portfolio manager Marcus Morris-Eyton say that his team’s latest discussions with companies are far less bearish than headline data suggests. Perhaps there is still some life left in the markets after all.