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An Overview Of Global Economic Activity & Valuations

View profile for Peter Jackson
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For the first time in a while, we seem to have some degree of reasonable and synchronised growth in all geographic and sectors of the world economy. The US and Canada, continental Europe, Asia (including China, India and Japan) along with many emerging countries in Africa and Latin America are all seeing their economic activities growing at rates commensurate with what might be expected of them. This means above 6% in China, a little under this level in many emerging countries, and around 2% in many developed countries, apart from the UK. It appears that almost ten years after the start of the “Great Financial Crisis” matters are returning to some degree of normality. Economic activity globally can be a virtuous circle and this can continue until the economic cycle ends, as it inevitably will do either gradually, or abruptly, as central banks put the brakes on by “taking the punch away from the punchbowl” as one American Federal Reserve Bank governor put it, meaning applying higher interest rates to an overheated and inflationary economy.

There are always reasons for not investing in share markets and if you want an excuse not to invest, here are a few:

The North Korean situation may blow up, possibly involving nuclear weapons.

The powder keg in the Middle-East might also blow up (think Kurdistan, Iran, Yemen, Syria), and with it still being the home to the majority of the world’s oil production, would send oil prices sky-high and the world into recession.

The leadership in the world’s largest economy may get even worse.

For the UK (but a small player in global circumstances) we might have a terrible Brexit.

Stockmarkets are overvalued??

Quantitative tightening led by the Federal Reserve Bank in the US, with a new governor replacing Janet Yellan, along with too many increases in interest rates too quickly, could push the US into recession.

As I have said before, there is always something to worry about. Stockmarkets climb a wall of fear. In the meantime, are stockmarkets overvalued? Well the US is not cheap anymore, after rises of 25% and 80% in the US over two years and five years for example. However, there are quite a few different factors to be considered when trying to ascertain value. One is the Shiller method which takes into consideration the ups and downs of earnings in an economic cycle and compares that to the current price or value. On this method some markets look stretched especially the US. However, investors have to put their money somewhere and when you compare the dividend yield on the FT All Share Index of 3.8%, to the 1.4% on the 10 year government bond or 2.6% on the 10 year investment grade corporate bond, let alone the virtually zero returns from interest on cash, markets no longer look so expensive. For the last ten years we have been living in extraordinary times with low inflation and very low interest rates, and this is likely to change, albeit slowly.

On the horizon for UK stocks is the question of Brexit, not only the leaving of the EU per se, but the manner in which we do it along with the political uncertainty, which was enhanced by the results of the Election in June 2017 and the resulting possible government instability. The bookies put Labour and the Conservatives at neck and neck to get the most seats at the next General Election.

A hard Brexit will not be good for the UK economy and will certainly not be good for Sterling and whilst a weak Sterling is not good for the UK population as a whole, it can be good for certain types of UK companies, principally those that source in the UK and then export, or for those like the majority of the FTSE 100 Index stocks, where 70% of their earnings come from overseas in the first place. Our equity portfolios typically have less than 30% in UK equities, with the remaining equity content overseas, and the percentage in UK equities is likely to be reduced further in the foreseeable future.

Please get in touch if you would like to speak to me about investments and wealth planning.

 

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