IS that it? Are markets now ready to move on from some of the gloom that characterised the third quarter?
We’ve argued for some time that the pessimism implicit in large parts of the world’s capital markets has looked inconsistent with incoming data on the world economy, which remains mixed but far from disastrous for the moment. We still suspect the current economic cycle has further to travel.
Jitters around China’s lumpy slowdown, US monetary policy and assorted other unknowns will surely return and we’ve long warned that we’re likely closer to the next US recession than the last. Of course, the consensus very rarely gets the timing right - many of those confidently predicting an imminent global recession in the last month are the same talking heads who have been doing the same for much of the last several years.
This doesn’t mean these perennial doom-mongers can’t be right this time, but with important leading indicators pointing in the opposite direction, towards continued growth, we see clients still being best served by tilting diversified portfolios towards equities.
At times of stress, the urge to widen our net and pay more attention to data series and news flow that would usually pass us by - from Chinese nooodle prices to quarterly corporate outlook statements - becomes significantly harder to resist. On the other side, market turbulence tends to diminish the airtime available for more balanced, sober analysis in favour of more determinedly gloomy perspectives.
The combination of the two can exert a powerful, albeit more often than not temporary, pressure on capital markets. This is not to suggest that there is no substance in such fears. Just that sometimes, tuning out much of the noise and remembering that there remains as much, if not more, cause for optimism as there is for pessimism can provide profitable investment opportunities.
Investors would be wise to expect further tests of their composure ahead. Weak inventories and strong imports seem likely to see Q3 US GDP come in below 2 per cent, which may worry some; meanwhile, the Chinese economic slowdown will likely contain plenty of further bumps in the road yet. US politics may also be worth keeping an eye on in coming months, along with the mass of events and news flow that remain as yet unknowable, both good and bad.
However, there is so far insufficient evidence that the next US and global recession is imminent in our opinion. This means that we still see clients with appropriate risk appetite being best served by tilting their investment portfolios towards equities and away from bonds.
For their part, bonds, particularly the higher quality government and corporate issues, may well stay expensive for a while yet. The Federal Reserve is clearly in no hurry to raise interest rates and durably perkier inflation may well continue to look a distant prospect until we see US wages rise.
However, even if the Federal Reserve does indeed leave the first interest rate rise till next year and we are left waiting longer for a slightly less subdued inflation outlook, the contribution of high quality government and corporate credit to investment portfolio performance is likely to be small from these levels.
:: Jonathan Dobbin is head of wealth and investment management NI at Barclays. He can be contacted on 028 9088 2925 or email jonathan.dobbin@barclays.com.
