Richard Buxton Chief Executive Officer at Old Mutual Global Investors shares his thoughts on the main investment lesson of 2017, what to watch out for in 2018 and his New Year resolutions.
On one hand, 2017 saw a new market ‘normal’ of low volatility and high financial leverage –conditions vulnerable to various shocks. On the other hand, economic growth has broadened globally, supporting profits. Richard Buxton from Old Mutual Global Investors considers the opportunities and challenges of this precarious setting.
As long as inflation remains subdued, investors appear willing to buy riskier assets of lower credit quality in their hunt for income. This anchors bond yields and sustains rich asset valuations. In so doing, they are seemingly contributing to an environment of low volatility and high financial leverage.
This situation feels uncomfortable for many investors, who remain nervous that something will undermine this ‘new normal’: an inflation surprise, higher bond yields, an exogenous geopolitical shock perhaps, a market dislocation causing an unwinding of leverage. But economic growth has broadened globally this year, notably in Europe, ensuring sufficient profits growth to maintain this uneasy equilibrium.
By definition, any of those issues I mention above which might upset this low volatility, slightly complacent scenario.
Has US inflation been so structurally challenged by demographics, new technology and the ‘Amazon effect’ as to mean the relationship between employment levels and wage growth is permanently broken? Or has the elastic simply stretched and, at some point, we see a spike up in wage claims?
If the US central bank delivers on its signalled path for interest rates, fairly soon we’ll be looking at an inverted yield curve – traditionally the harbinger of recession. This happens when short-dated bonds yield more than bonds of longer maturities, typically a signal that investors have little confidence in future growth prospects. Inflation and bond yields are therefore high on my watch list.
My central case is that the global economic recovery from the financial crisis continues to broaden and deepen. Aside from shocks to markets inducing more normal levels of volatility – which would actually be welcome, in my view – there should be enough modest levels of profits growth around to support further progress from equity markets over the course of the year.
As interesting, will be to see if the willingness of markets to accord ever higher multiples to ‘growth’ stocks continues, or whether there is any reward for a more ‘value’ driven approach. Valuations of UK domestic economy shares have fallen to levels where should the UK consumer start to feel more confident about life, or sterling were to strengthen on the back of more positive Brexit developments, these areas of the market could present the investor with real opportunities.
Additionally, should recent oil price strength be maintained – and investor confidence in the sustainability of dividends from the likes of Royal Dutch Shell and BP grow – here is another area of the market that could attract renewed interest.
Not to get ground down by the persistence of momentum-winning strategies. Stick to your ideas of highest conviction, even if they are continuously shunned by investors. As long as you keep re-visiting the investment case, questioning, probing and concluding that the valuation and investment case remain valid, keep with it.
Spend more time with my step-sister’s young family. Try to buy fewer paintings. Undertake more long country walks. Cook more new dishes rather than old favourites.
Please remember that the value of an investment can go up or down, and may be worth less than an investor pays in. Past performance is not a guide to the future.
This article is directed at professional investors and should not be distributed to, or relied upon by, retail investors.
Content in this section is provided by Old Mutual Global Investors. It does not constitute any financial or other professional advice or recommendations.
Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Old Mutual Global Investors as a result of using different assumptions and criteria.
Richard Buxton, Chief Executive Officer at Old Mutual Global Investors