With news headlines continuing to stir up confusion and uncertainty, it’s a good time to step back and consider what’s really important. Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, looks at the main issues we should pay attention to and the areas we may be able to learn from.
Investors need to take a pretty broad view of events at the moment. Certain countries, such as Germany, and certain sectors, such as manufacturing, are going into recession, with the slowdown in global trade having a major effect. On the other hand, other parts of the world economy are actually doing well - consumer spending is growing in most countries, with service sectors such as travel and leisure holding up. So the first factor to consider is whether manufacturing will pull the rest of the economy down or whether it will eventually recover if the rest of the economy holds up.
Business and consumer confidence will be important here, so politics is the second issue investors should pay attention to. Will opinion polls and the threat of impeachment in the US encourage or discourage President Trump to be more conciliatory? Will Brexit tensions pick up or die down, and will they have as big an impact on Europe as on the UK? Will tensions in the Middle East die down? These are just some examples of the political issues that may have an impact on business and consumer confidence.
The third thing to look at is central bank decisions. We've had a series of interest rate cuts in the major economies in recent months. Do these simply help existing borrowers survive a difficult period, or do they actually encourage more borrowing, for example to buy cars and homes, or for business investment? A key question is: was central bank easing a case of too little too late, or enough to make sure that global growth is sufficiently robust going into 2020?
There isn't enough focus on this question at the moment. Of course we need to look at economic data, understand central bank signals and consider future company cashflows. However, we also need to understand the structure of markets - who's buying and selling, and why. And we need to consider if there's too much confidence or, on the flip side, excessive pessimism.
For example, as we saw back in December 2018, if good economic news appears when investors are too negative then asset prices can rebound. The latest surveys of fund managers still suggest that many are concerned - we think overly concerned - about the outlook for the world economy and company profits. Cash has built up and could be put to work.
There's been so much attention on the relationship between the US and its major trading partners in Asia and Europe that many investors haven't paid enough attention to other areas of stress. One example is the worrying events in the Middle East, in particular the drone strike on the oil facilities in Saudi Arabia. Although this time the impact was short term, it's reminded investors how vulnerable the area is to military conflict. The next time may be different.
Another surprise was the structure of US interest rates. While the Federal Reserve has been lowering its official rate as an insurance policy to keep activity moving ahead, it was a shock to the markets that the bank lost control of short-term rates for a week or so - which spiked much higher. The reasons for this are highly technical but, in essence, the balance sheet of the Federal Reserve needs to be handled more carefully. Questions are being asked about the state of financial 'plumbing' in the US.
I've talked before about the slow pace of economic growth in the major world economies. Organisations such as the International Monetary Fund and the Organisation for Economic Co-operation and Development have already lowered growth forecasts for 2020.
What does this mean for company profits? Can firms keep a tight control on costs? Even if export demand isn't strong, will there be any benefit from stronger domestic demand? Going into the autumn, we'll be looking very carefully at the details of corporate earnings reports and the forecasts by senior management for 2020.
We remain fairly upbeat about company profits. We still favour many global equity markets - including the US, Japan and emerging markets, but not Europe and the UK - and various high-yielding bond markets, such as emerging market debt. Our rationale is that we foresee slow growth but don't expect a recession, while investors need yield in a world of low interest rates.
We're seeing much more interest in this area both from company management and investors. More firms are wanting to demonstrate their 'green' credentials, or are responding to pressures from retail and institutional investors.
Climate change may not yet be having much effect on markets as a whole, but for individual sectors - energy, utilities, transport, insurance, to give just a few examples - it's rapidly rising up the list of topics which our analysts want to research and discuss with senior management. We're writing about this issue regularly in our Global Outlook publication, and the October edition is all about environmental, social and governance (ESG).
The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your clients' investments can go down as well as up and may be worth less than was paid in. Information is based on Aberdeen Standard Investments' understanding in October 2019.