Weekly update - Should we fear slowing growth?
It has been over a decade since the 2008 financial crisis and headlines are again becoming cluttered with predictions of another global recession. Never a pleasant thought for investors when the aftermath of “The Big One” is still so fresh in our minds. In addition to this, we are seeing fuel being added to the fire with ongoing political tensions such as the never-ending Brexit fiasco and the US China trade war. So should investors be apprehensive about their exposure to financial markets amid fear of increased volatility or even a market sell-off? Well there are certainly warning signs out there. We have recently seen for a short period, an inverted yield curve, the first time since 2008, and we know that economies globally are slowing. In a recent report, the International Monetary Fund downgraded expected global growth for 2019 to a rather weak 3%, down 0.3% from its April forecast.
Asia got a modest outlook with its lowest expected rate of expansion since the financial crisis at 5%*. Despite this fact, it does remain however one of the fastest growing regions in the world and a firm favourite of ours.
There is an argument that the global economy is in better shape than the media would have us believe, and that behind the scenes central banks are fighting the fire with financial stimulus that should support both financial markets and global economies in the months ahead.
So, rather than jumping out of the market entirely and waiting for the headlines to improve (potentially a long wait), we would argue, that it is better to be invested in the right assets and being realistic in our expectations. It is evident that we are in a low growth environment with a slowing outlook and as such we cannot expect to achieve the type of returns associated with those at the beginning of a bull run. It would therefore be prudent when reducing growth expectations to dial down one’s risk appetite and growth reliant assets.
We have seen market volatility pick up in the last two years and we need to appreciate that this will likely be an ongoing theme for the foreseeable future. Simmering geopolitics does nothing to reduce this trend with the impact of the attack on Saudi Arabia’s largest oil refinery being a perfect representation of this. Leading as it did to the wiping out over 5% of the world’s oil supply overnight and the largest jump in global oil prices (circa 20%) since the 1980s.
As investment managers, we are responsible for managing expectations as well as portfolios and this is more important than ever in times of uncertainty. Yes, we are seeing a lower level of economic activity, and this, in turn, could have an adverse effect on stock market returns. And yes, it seems likely that volatility will remain elevated thanks to high valuations and rising political and economic uncertainty. But this is exactly where active managers can really demonstrate their value and a rigorous process with careful stock selection is likely to come to the fore.
While the world seems more uncertain today than ever, it is important to bear in mind that the future is always uncertain. And often uncertainty can provide opportunity for those with the tools to separate the wheat from the chaff. The UK is a great example of this. Stocks have been battered by the uncertainty around Brexit, some fairly others less so. This is an area where our advisory team is finding rich pickings as a result.
If you will excuse us an overused quote, the UK looks like just the sort of thing that Warren Buffet was thinking about when he said "Be […] greedy when others are fearful".
For our discretionary clients, who follow our long-term and globally diverse thematic process, we are as always on the lookout for risks and opportunities on your behalf. Our team is well versed in navigating the type of choppy waters we may see in the months or years ahead. Whenever we do see the next major downturn, and that could be quite a while yet, it will be the team’s third having been through the dot com bubble in the late 1990s and the global financial crisis a decade ago. On top of this, our valuation driven approach, which naturally leads us to being more cautious as risks rise, has, in recent years, inched the team into an increasingly defensive stance leaving plenty of dry powder to deploy in any sell-off. Despite that cautious stance, it is really pleasing to see the strategies still providing clients with strong returns. Over the last 12 months we have seen both volatility, in the sell-off in fourth quarter of last year, and a strong rally in 2019 and it is great to see all four of our core strategies beating their respective Investment Association peer groups over that period.
In many ways, investing is like any other long journey. We will always encounter a few “bumps in the road” along the way, however if we never go over any bumps we will never reach our destination. So, for us, when the headlines turn bearish and talk of recession abounds, it is more important than ever to make sure that you are happy that your portfolio is ready for whatever the future holds and we are, as ever, here to help.
*Source: International Monetary Fund
FINANCIAL PROMOTION: The value of investments and the income derived from them may go down as well as up and you may not receive back all the money which you invested. Any information relating to past performance of an investment service is not a guide to future performance.