The Outlook for Markets: Not Enough Bad News!
Investment markets are unusually confusing. On the one hand, there’s a lot to worry about. But on the other hand, there’s no panic. Investors generally seem willing to hang on, believing that the slowdown we’re experiencing won’t get anything worse than a mild recession… No serious threat to a world that’s steadily growing richer.
Nevertheless… the International Monetary Fund says the global economy is weakest since the financial crisis a decade ago. Its new managing director, Kristalina Georgieva, says the chill in the air reminds her of a line from the Russian poet Alexander Pushkin: “The breath of autumn begins to ice the roadway.”
America increasingly pays the price for the Trump administration’s trade war, troubling its central bank enough to abandon its policy of “normalization” and revert to cheaper-money stimulus. Although investors generally expect Trump to declare “victory” in his fight with China to clear the path for his re-election next year, that still hasn’t happened.
Europe struggles to achieve economic growth in a global environment of trade conflicts. Germany, its locomotive, is in the vortex of trouble. The major industry in this, the land of Mercedes, BMW and Volkswagen, is being hammered simultaneously by weak demand, the flight from diesel, increasingly aggressive carbonatic requirements by governments, and the hugely expensive transformation to electric vehicles.
Brexit hasn’t happened yet, and its execution remains uncertain. Boris Johnson needs to win the general election with a clear majority in parliament. But even if Brexit does come about, years of uncertainty will follow as both Britain and its European partners re-shape their trade flows to conform to a massive new rule-book of tortuously negotiated agreements. And obligations.
China continues to grow, but more slowly than for three decades. It has to juggle conflicting priorities of countering trade war negatives, greater focus on developing high-tech industries, and keeping happy more than a billion people.
The biggest long-term threat to investors would seem to be that globalization, spreading development through infotech, free trade and supply chains, is losing its power to drive economic growth. Even if the tariff war comes to an end, it has frightened multinationals enough to make them reduce their dependence on global supply chains that maximize profits.
The world is moving away from “asset-heavy” growth based on construction and huge manufacturing plants consuming vast quantities of metals and fossil fuels to “asset-light growth” based on advanced technology, with small numbers of highly-skilled staff, automation, scarce minerals and harvested data.
There is also the new threat of social breakdown. Our news screens are awash with riots. In some countries radicals of Left, Right or even both are gaining support, even power. Causes seem to be very different or even contradictory.
What does seem to be in common is rebellion by populist masses against elites that have managed things too long exclusively for their own benefits; rebellion made possible and incited by the explosion of social media that cannot be controlled by the elite’s institutions. It’s too early to judge how far this will go, how damaging it will be for economic growth – but it won’t be good.
How will this impact on investment? Are the markets reflecting something more than cyclical slowdown magnified by the (hopefully) temporary factor of the trade war?
In American stock markets the consensus expectation of analysts for earnings growth of the 500 biggest companies is down from a peak of 23 per cent in September last year to just 1 per cent.
The bloom has gone off the amazingly high-growth tech sector as political hostility mounts to Google and Facebook, which seem to be incredibly inept at handling the firestorm. (Their censorship “precludes anyone who wishes to express a sharply bearish view from acquiring advertising space,” Eoin Treacy reports). They face major threats of tough regulation, punitive taxes and being forced to break apart.
However, it’s unwise for investors to be too pessimistic. Many trends remain surprisingly positive….
► American share markets, far from falling, as you would expect if investors were anticipating bad times, have been climbing to new highs. In the case of the S&P 500 index of the biggest listed companies, to a new record. Wall Street continues to lead as it has over the past ten years, when it has outperformed the rest of the world, partially thanks to buybacks leveraged with dirt-cheap credit.