Market Commentary – 24th January 2018

Could this year’s growth be better than expected?

Thanks to recent tax cuts in the US, the International Monetary Fund (IMF) has said that global growth could be better than expected. The latest update of the Fund’s World Economic Outlook (WEO) revised the global growth forecast to 3.9% this year and next, which works out to be approximately two-tenths higher than its previous estimate in October. The IMF has also estimated that the G7 countries, each grew more than 1.5% in 2017. That kind of synchronicity is uncommon, and it might set the world to grow better than expected this year.

Despite the good figures of growth and expected growth, the IMF has warned about the exuberant financial markets, which as we have documented plenty of times before, are due for a correction at some point. If you look at the attached document, all the barometers we track are showing that things are dangerously good. Global growth has been accelerating since 2016 and all signs point to a continuous strengthening of that growth, however complacency is a risk. As a market correction is imminent, the size of the correction is questionable, given the pace of growth currently in the industry. The IMF has encouraged countries to be optimistic with the current global reflation trend around the world, however IMF Chief, Christine Lagarde has warned that they should be satisfied with the growth. This means that they should still be cautious of an imminent correction. If we look at the Relative Strength Index (RSI), which is a momentum index, it shows that the US markets are well over their overbought figure, and this is raising alarm bells all over to investors.

Aside from the exuberance fuelled by US tax reform, risk assets continue to be boosted by strong growth and the acceleration in global industrial activity, helped by a soft US dollar. We are conscious of worries about bubbles, but a “melt-up”, a further sharp surge in valuations from expensive levels may be more likely this year than a meltdown. The global cycle has entered the new year in rude health. While the current expansion is longer than historical averages in some economies, it’s still some way off the historical maximums. The expansion, like any other, won’t simply die of old age. Low trend inflation and macro volatility as well as extremely well-anchored inflation expectations are likely to keep discount rates and term premia low for yet another year. Hence, we will probably need different benchmarks to judge bubble valuations. US prices are closest to what would be described as bubble valuations. But a growth resurgence amid low discount rates makes a melt-up in valuations likely. This, in the view of economists, will be very positive for catch-up by cheaper markets.

For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.

Model Portfolios & Indices

Over the last week we have seen most of the indices that we track, continuing to reach record highs and this is all very exciting for the markets, but as we have documented, with an imminent correction, we should remain relatively concerned by the current movements in the markets. Throughout this week, Wall Street stocks are again a bit higher despite the continued federal government shutdown. The game of political brinkmanship has been played so many times now that market participants aren’t going to be unnerved too greatly at this stage of the game. We still prefer a larger weight for equities, given the rise in equity risk premia over 2017. Equally, we like the idea of small portfolio hedges, based on the prospect of higher volatility this year. This is a strategy adapted in our Outcome Based Investing (OBI) models, which will be cyclically adjusted, as well as having small hedged positions when the markets to come to a correction point.

You may note that the performance of the indices is up, however our portfolios have remained relatively flat. The reason for this is the timing of our portfolios getting priced in. From the indices, these are priced frequently, however the constituents of the funds we hold in our OBI strategy get priced in once a day and therefore the reflection in price is lagged.

Important Information

The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.

This Day in History

The California Gold Rush began on January 24, 1848, when gold was found by James W. Marshall at Sutter’s Mill in Coloma, California. The news of gold brought some 300,000 people to California from the rest of the United States and abroad. The sudden influx of immigration and gold into the money supply reinvigorated the American economy, and California became one of the few American states to go directly to statehood without first being a territory, in the Compromise of 1850. The Gold Rush had severe effects on Native Californians and resulted in a precipitous population decline from disease, genocide and starvation. By the time it ended, California had gone from a thinly populated ex-Mexican territory, to the home state of the first presidential nominee for the new Republican Party, in 1856.

As always have a wonderful week and stay safe.

VBW

Jason Stather-Lodge  CFP, MCSI, APFS

CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager