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August has traditionally been a difficult month often characterised by a summer lull as investors and fund managers seek warmer climates. Whilst this year proved to be no exception – with record temperatures and stock market moves – there is a clear dichotomy between sentiment and fundamentals with views changing at the slightest news flow.
The post–financial crisis bull market recently became the longest in history and the S&P 500 continues to reach new all-time highs. Even in this backdrop, it is interesting that these gains have been made in spite of a difficult economic and political environment over the past decade. More recently, the prospect of trade wars, a surging US dollar, rising interest rates and the withdrawal of stimulus by central banks has failed so far to derail the bull, at least in the US.
We continue to bear in mind that, as share prices rise, valuations become stretched. It is important to justify current high valuations by having a strong global economic growth environment to boost company earnings.
The problem is that the backdrop is actually one where the economic cycle growth rate has probably peaked, we have trade disputes and we have monetary tightening in the form of central bank stimulus being removed or interest rates being raised. It’s far from the perfect mix of conditions although it does provide opportunities in a diverse portfolio.
Turning to asset class views, we remain negative on rates with a bias towards Europe and expect US rates to remain at current levels. In credit we continue to prefer high yield over investment grade targeting quality issues and short duration in anticipation of interest rate moves. Equites continue to provide interesting debate, but at this juncture we remain neutral to positive with a tilt developing towards European markets with attractive valuations and cognisant that the US market has performed well year to date.
We expect global growth to remain resilient, but we see evidence of the recovery being less synchronised. Earnings growth should remain positive and inflation will likely cause gradual interest rate rises.