By Russell Collister (Chief Investment Officer, FIM Capital Limited):
Global equity markets have staged a remarkable comeback in 2019 after a dismal end to last year. Performance tables are no longer drenched in red and most markets are in positive territory year-to-date, confounding those who cashed in early. Patience it seems, is indeed a virtue, as too is the strong stomach needed to tolerate the gyrations which seem to define modern equity investing.
The explanation for last year’s market fall has been the main reason for this year’s rise. Like it or not, the US Federal Reserve Bank is still the leading influencer of global monetary policy. In 2018, higher US interest rates badly affected nearly all market classes. This year, the Fed’s policy U-turn has had the opposite effect. Last December’s ‘dot-plot’ projection for two interest rate hikes in 2019 has been changed to precisely none. The Fed now expects just one quarter point rise in 2021. Markets (the ultimate judge and jury) actually think that the Fed could even cut rates later this year.
Such a simple explanation for the drama experienced over the last few months seems to be too easy. Of course, there are many other sub-plots going on behind the scenes. For instance, corporate results year-to-date have generally been quite good. The market, however, has become accustomed to the gentle manipulation of quarterly earnings expectations, so much so that in the US at least there are typically few earnings ‘surprises’ any more. As a consequence, greater attention than ever is paid to the accompanying statement from the CEO. This information is ‘in the market’ in an instant, of course, and we still find it far more valuable to speak to the management one-on-one or attend annual general meetings when boards are frequently put on the spot by grumpy shareholders with time on their hands.
These days, we are awash with data, yet markets still seem able to only concentrate on one thing at a time. In December, talk was of a growing crisis between the US and China as Trump declared his support of trade tariffs and investors quickly calculated the impact. Today, the US-China talks barely merit a mention. The US president remains obsessed with building a Mexican wall and the like, whilst the UK and Europe are obsessed with Brexit. Both areas are complex for entirely different reasons. The exoneration of Trump by the Robert Mueller report into collusion with the Russian government strengthens the Republican’s grip on power as the 2020 election campaign approaches. In the case of Brexit, currency markets in particular seem to have given up predicting any outcome, good or bad. Politicians have dug themselves into such a deep hole that Brexit may be deferred for some time to come. Just about every outcome is possible, from a second ‘people’s’ referendum, to a customs union or simply revoking Article 50, meaning no Brexit at all. A ‘no-deal’ Brexit would be the worst option in the near term, but the current crop of politicians must realise that few of them would keep their jobs, if ever this came to pass.
The investing world, therefore, remains as it typically does; frustrating and unpredictable. Thankfully, despite the noise, the companies in our funds show much more stability when it comes to earnings and dividend growth. There are some tricky areas. Profit margins, for instance, are sometimes a little thinner than we would like, and valuations are relatively full. With inflation still very low, however, it is often hard for businesses to justify price rises when consumers now expect the opposite. The world is also getting smaller. The list of sectors into which we are happy to invest seems to shrink every year whilst the number of basket-case economies, Venezuela being the latest but certainly not the last, reduces the investable universe, even before we have studied individual balance sheets.
There are, nonetheless, still many companies which pass through our data filters and are well placed to benefit from future economic growth. Macro-wise, global GDP is forecast to reach 3.3% this year and slightly more in 2020. Modest, perhaps, but still significant relative to short-term interest rates and inflation in most major markets. As ever, therefore, there is still plenty to go for, especially for those looking for reliable income streams where equities still command a significant yield premium over cash and government bonds, a state of affairs which is likely to prevail for some time to come.