DIY Investor Magazine
/
December 2015
7
The collapse in commodity prices has hit some
emerging markets hard and, where they have home
grown political problems to contend with (as Brazil
and Malaysia do for example) this has compounded
the problem. Russia’s actions in Ukraine and latterly in
Syria have created their own tensions and sanctions
have hit that market hard.
The Middle East may be dominating the news headlines
but, unless the conflict spills over into Saudi Arabia or
Russian/ NATO tensions increase, we don’t see much
of an impact on markets. The direction of the global
economy is, as ever maybe, hard to call. We asked
two respected investors, Wouter Volckaert, manager
of Henderson Global Trust, and Peter Elston, Chief
Investment Office at Seneca IM, manager of Seneca
Global income & Growth for their views.
Wouter thinks that it might be too early to be outright
bearish on the market going into 2016, but would
certainly suggest that it is too late to be bullish. The
market has more than doubled since the lows of March
2009. Most of that return has been generated by
multiple-expansion on the back of a loose monetary
policy. Low interest rates and quantitative easing have
created a wealth transfer from non-owners to owners of
assets.
Wouter also believes equity valuations could continue
to move up on the perception that “There Is No
Alternative” (TINA). Investors who want to put cash
to work increasingly turn to equities, especially now
that fixed income is losing its appeal in a rising rate
environment. But TINA is unlikely to have the same
enchanting spell on the market as the central banker
- Draghi, Bernanke and Yellen, - the impact of real
fundamentals on valuation will increase going forward.
He goes on to say that economic data and corporate
earnings growth will become the most important driver
of equity markets, and the outlook remains muted.
Nominal GDP growth should remain low on the back
of a further slowdown in Emerging Markets. Inflation
will remain low thanks to the deflationary impact of the
technology/internet revolution, the ageing consumer,
the debt de-leveraging cycle, and the stronger-for-
longer USD. There is little room for corporate margins,
especially in the US. And the pace of company share
buybacks is slowing.
Relative to other regions, Wouter prefers Europe top-
down. But I do like the US bottom-up (i.e. looking at
individual companies). He thinks Europe is cheaper and
there is more room for positive earnings surprises as
we start from a lower level. However, in order to benefit
from that you need to invest in the riskier cyclical
European stocks. Quality defensive European stocks
are near record valuation levels. We see the opposite in
the US, where the market is slightly more expensive but
quality stocks are cheap and growth is expensive.
So in short, Wouter is not calling the top of the market
just yet. But does believe investors should be cautious
and that the year ahead will be volatile and challenging.
And stock picking will matter as much as regional
allocation.
Peter Elston points out that it’s now almost seven years
since the global financial crisis and interest rates are
still flat on their back. That there is something unusual
going on is without doubt. The question is, what?
In a nutshell, those wishing to save, whether companies
or households, currently far outweigh those wishing
to invest. This has pushed down real interest rates to
a very low level (in some cases negative) that should
discourage saving and do the opposite for investment
demand.
The problem is that investment demand is weak
because of such things as falling population growth
and the impact of the internet (the latter is counter-
intuitive, but smaller companies that previously
accounted for a large share of global investment now
have to compete with global on-line operators, and
their investment plans have been impacted as a result).
He thinks desire to save (rather than to consume) on
the other hand has been driven by the uncertainty and
lack of confidence that still prevails following the global
financial crisis.
Nonetheless, things are gradually improving, as
evidenced by unemployment rates that continue to
fall and in some cases still have a long way to fall.
The length of the global economic recovery will be
commensurate with the severity of the 2008-9 crisis, so
expect economies to continue to eke out growth for a
while yet, all the while supported by central banks.
