Global Investment Committee Outlook: Moderately Cautious on Global Equity
How Were Our June Meeting’s Predictions?
It certainly has continued to be a wild ride for investors, with political developments having caused just as much volatility as economic ones. Unfortunately, political considerations are hard for most people to predict, but they are clearly of great importance to markets, so our clients wish to hear our opinions and we do our best to give experienced and objective advice. So, while we clearly did not foresee all the conniptions, our view that political developments, including the tariff war, BREXIT and other geopolitical issues would worsen substantially and, thus, be troublesome for the markets has turned out to be reasonably accurate. Indeed, in late June, we reversed our long history of thinking that markets would look past political troubles and so, we made a rare prediction that global equity returns would be slightly negative ahead. For long-term global investors, this did not mean turning bearish, just cautious. This caution was warranted as the MSCI World Index rose only 1% in USD terms since then through our September 26th meeting date, vs. our expectation of a 1% decline through end September. In-between was often gut-wrenching volatility and uncertainty. Meanwhile, our favored benchmark global bond index rose 1%, nearly exactly as much as we expected, in USD terms (although each region’s bonds were stronger than we expected, the USD was also stronger than expected, which reduced the USD-termed index return).
Global Growth Should Moderately Disappoint
As for our meeting on September 26th, we were, like in June, quite evenly divided between a rather benign global scenario and a continued moderately-cautious scenario, but ended up choosing the latter. Clearly though, we have some bias towards a slightly better outcome.
Global GDP continues to be in a soft patch, primarily caused by the fears and direct effects of the U.S.-China trade/technology war. So, the question continues to be how long the war and soft patch last and what will central banks do about it? We continue to be moderately pessimistic on both fronts. China and the U.S. will likely only make a moderately effective deal and while central banks have made small moves to prevent sentiment from declining, they are cautious about promising too much, especially as both the Fed and ECB are torn down the middle as to how much, if any, additional accommodation should be given. In the most vivid example, members representing nearly 60% of Eurozone GDP were against re-instating QE, but Draghi rammed it through, saying there was broad consensus and, thus, no legal need for a formal vote.
Equity markets dipped sharply in August, but then recovered as new U.S.-China talks were announced, coupled with some mild truce moves (although China’s agricultural purchases are due to desperate shortages), and a no-deal BREXIT seemed to have been prevented for a while. However, we still expect that these and other issues will not proceed well and will likely decrease economic growth, corporate profits and risk appetite, though not harshly so. Additionally, we expect the upcoming U.S. election to be a much greater worry for markets and for some parts of the economy. We now also expect Trump’s re-election odds to be seen next quarter as only a 50% chance, which will worry investors about the somewhat anti-business Democratic Party gaining power, as even without control of both Congressional houses, a Democratic President could institute major changes via Executive Actions and the power of the bureaucracy and regulatory agencies, much as Trump has conducted for instituting his agenda.