Global equity markets showed resilience despite a challenging third quarter, characterised by trade tensions, a spike in the oil price, ongoing concerns about slowing global growth, and of course continued uncertainty related to Brexit.
Economies around the world are starting to feel the impact of the US-China trade war. Both the US and China announced further tariffs during the quarter, with the US targeting consumer goods for the first time. In addition, the Iranian attack on Saudi oil fields caused a spike in oil prices, which raised concerns about the ongoing economic effect of a sustained Iranian campaign.
Against the backdrop of low inflation, escalating trade conflicts, and other geopolitical uncertainties, central banks in the major economies continue to provide support via monetary policy. In the US, the Federal Reserve (Fed) cut interest rates for the first time in 11 years.
Over the last decade, since the Global Financial Crisis, investors have benefited from global economic expansion and positive stock market returns. Interest rates have remained extremely low throughout this expansion period, supporting growth in equity markets. In the US, as the cycle developed, rates started to rise. However, as the economic outlook has softened, policy makers are cutting rates once again. The key question is whether falling rates are now an indicator of recession, or whether lower rates will prolong the growth period, particularly for well managed global corporations. If rates remain low for several years going forward, then it can be argued that equities are broadly reasonable value, and certainly not expensive relative to other alternative investments, such as bonds and cash.
The shares of high quality businesses will continue to remain resilient due to the relative certainty of their future profits’ growth. Our investment process is designed to avoid companies which have less certainty and are therefore less resilient. This year, the positive sentiment toward more ‘aspirational’ businesses has turned negative, as evidenced by the failure, or poor performance, of certain high profile initial public offerings (IPOs) such as WeWork and Uber. Companies such as these promise exciting new ‘disruptive’ business models, but are often burning cash and sustaining enormous losses, and don’t have a reliable plan to become profitable. Perhaps the shift in focus away from these aspirational growth companies will provide further support for businesses with strong balance sheets and sustainable business models.
From a geopolitical perspective, the next 12 months will certainly contain further uncertainty, but is also likely to yield some positive developments. The UK election on 12th December may or may not in itself provide more certainty, but in the next year we are likely to see a conclusion to the UK’s future in Europe, which is vital for UK focused businesses and foreign investment. In the US, the presidential election is now less than 1 year away. Markets often perform well in the final year of an election cycle, as the incumbent government work to present a positive outlook to the electorate.
As ever, we don’t rely on a crystal ball to determine our long-term investment strategy. We continue to focus the dominant part of our strategy on large multinational companies that benefit from long term trends which are structural and not cyclical. Strong multinational companies with robust growth plans and healthy balance sheets should continue to prosper over the long term, and volatility often provides opportunities.