For those who have followed the news closely over the last month, the urge to stock up on tinned food and shotgun cartridges and prepare for life after the apocalypse must be strong – at least all those hours boggling at Ray Mears surviving in rural Surrey will not go to waste? Many of the institutional norms that have helped guide the world economy through a period of unrivalled success, marked by plunging poverty levels, war and violence and soaring living standards, are under sustained attack. Policy agendas, long thought to be blind alleys or worse, are being championed as the answer to our ills, both real and imagined. For investors, the battle between this noisy political context and a still healthy global economic backdrop has raged for much of the first half of 2018 – will the rest of the year be any different?
After a year almost uncluttered by distractions for investors, 2018 has been littered with them. A pause for breath in the business cycle has coincided with a cursory inflation panic, a return of some volatility into markets, yet another Italian political crisis, a rarer German version, and a sharp and sustained escalation in global trade tensions. More recently, the aforementioned broadsides at long-sacred diplomatic norms and institutions may have helped to further unsettle investors.
As we look to the end of the year, the prospects for further healthy global growth remain plausibly rooted in a supercharged US private sector. Meanwhile, inflationary forces should continue to gather a little in the world’s major economies, but not sufficiently to turn central bankers and bond markets hostile. If that was it, the stage should be set for stocks to continue to outperform bonds...
For its part, the political tide is obviously significantly harder to forecast. Nonetheless, we continue to see US midterm elections in November as a likely restraining influence on the White House. The new Italian government may not make old bones, but then neither have the 65 that have preceded it in the post-war period. A more unruly exit from the EU could certainly harm the UK economy’s near term prospects, but it is unlikely to be of much sustained interest to the wider world and its capital markets.
Rather than reporting on the more prosaic and continuing progress of the world economy, 24-hour media naturally prefers to focus on the ever-changing whims of those presiding over us. A running commentary on output and earnings growth, however positive, would be unlikely to draw much of an audience. Even so, right now such a commentary based purely on incoming data on the world’s major economies and its companies would speak of a fruitful outlook for investors leaning towards risk assets like stocks.
For the moment, rather than take their lead from this improving fundamental backdrop, stock markets continue to peer nervously at the Oval Office and the President’s Twitter feed. We still suspect that this distraction is temporary. We are invested in such a way to take advantage of the dust settling on this current trade scuffle before the midterm campaign trail heats up in earnest. Some more patience, and perhaps fortitude, will no doubt be required, but we’re not yet convinced that the progress of the last few decades, or even few hundred years, is about to be reversed.
Populism is not yet an investable theme, in spite of the mass of industry marketing bumf suggesting otherwise. In spite of the many diversions, as we look towards the start of Q3, it is still corporate earnings and the lead indicators for corporate earnings (and wider economic growth) that are providing the most important signal for investors right now. From Asia to Europe to the US, that signal is still clearly speaking of better times ahead.