Not only is Giles responsible for the management of our Global Equity Fund Range at Aviva, he is also lead manager on our Global Equity Endurance Strategy. In this issue of Thinking Ahead, Giles shares his insights on where the stock market is heading.
Are markets pointing towards a global recession?
Last year proved remarkable for equities, as stock markets reached a series of record highs. 2018 started strongly too, with some respected investors forecasting a sharp rise in equities1.
However, after hitting a record high just shy of 2,873 on 26 January, US equities, as measured by the S&P 500 index, have fallen back – and it is a similar story with other key equity markets around the world. So with stocks suddenly struggling, are financial markets pointing to problems in the global economy?
Unfortunately, although the stock market can usually be seen in retrospect to have been a good predictor of the economy, it’s hard to know what it is signalling ahead of time. The old joke that the stock market has forecasted nine out of the last five recessions contains more than a grain of truth2.
Fortunately, other indicators are more useful at foretelling the future. The bond market has historically been among the best indicators and currently suggests a US recession is possible.
Looking elsewhere, investors could study the price of base metals such as copper to gauge the health of China’s economy, the world’s second largest. It consumes around half of the world’s supply of these metals and so exerts a key influence over their price on global exchanges.
Since each of these metals has its own peculiar supply and demand dynamics, particular significance shouldn’t be attached to the price of any one. But together they are a decent indicator of future fluctuations in the Chinese economy. Today, prices are down from their peaks set in the second half of last year3. While that might not be overly concerning given they remain higher than where they stood two years ago, it could be an early sign of slower growth.
So are the two largest economies in the world heading for tougher times, and should investors be worried? Our view is that global growth will accelerate slightly this year. Rather than experiencing a recession, the pace of economic activity in the US should quicken while China is expected to enjoy another year of buoyant growth.
So why are financial markets sending signals that suggest a far gloomier outlook? It may well be because the recovery from the global financial crisis of a decade ago, is now so well established that central banks around the world are withdrawing or are considering withdrawing the extraordinary policies introduced in the wake of that crisis. That means higher interest rates, which is leading investors to reassess the price they are willing to pay for stocks and bonds.
Certainly global stock markets appear extremely expensive according to a number of the measures used by professional investors, and may struggle to recapture their previous sky-high valuations quickly. However, the shares of large companies with sound finances – and that sell goods or services that people need, whatever happens to the economy – have been out of favour for several years now. They are starting to look increasingly attractive.
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