At our annual strategic asset allocation meeting, held in Cape Town earlier this month, we were overwhelmed with the contributions of each team member and had the privilege of having two new members joining us in James Sullivan (Coram Asset Management – UK) and Alan Blythe (MitonOptimal Isle of Man).
Without wishing to let the cat out of the bag, the team has concluded a more optimistic outcome for equities in USD and ZAR terms, due to an expectation that an extended period of global deflation has now given way to a reflationary cycle, beginning in the US, but spreading further afield. This, together with an expectation of a synchronised fiscal stimulus in the developed world, makes us optimistic that global equity proxies will provide investors with the best probability to generate real returns over the medium to long term.
The latest BCA report looks to confirm our more optimistic approach. I quote them as follows:
“The major countries, including China, appear to have entered a period of synchronised growth acceleration. The pick-up is confirmed by recent data on industrial production, purchasing managers’ surveys (PMI) and the ZEW survey.
The global ZEW composite has been a good indicator for world earnings revisions and the global stock-to-bond return ratio. The synchronised uptick in global coincident and leading economic data, including business and consumer confidence, suggests that there is more going on than simple post-election euphoria.
Eurozone sentiment measures hooked-up at the end of 2016 and the acceleration in growth appears to be broadly based. A simple model based on the PMI suggests that Eurozone growth could be as much as 2% this year, which is well above trend.
While Japan will not be a major contributor to overall global growth, given its well-known structural economic impediments; the most recent data reveal a slight uptick in consumer confidence, business confidence and the leading economic indicator.
BCA have noted the impressive rebound in China’s leading growth indicators for some time. Some indicators are consistent with real GDP growth, well in excess of the 6.7% official growth figure for Q4-2016.”
Given BCA’s more optimistic economic view, the model forecasts for 2017 EPS growth has been revised higher for the global aggregate and each of the major developed markets.
As such, it is encouraging to witness improved global PMI indicators (even in SA, the PMI data has bottomed and broken through 50, which serves as an expansionary indicator) and upgraded earnings revisions in Europe as well as Japan!
[Fig 1: FTSE All World Developed ex US - Financial Express - February 2017]
This does not mean we are not mindful of potential party-spoiling risks, amongst which we would include US protectionism and its potential impact on Emerging Markets, or an unexpected negative growth surprise in China, etc.
We remind investors that a portfolio of stocks outside the US equity market has not experienced an equity bull market for more than ten years now (See line graph above)
Perhaps it is time to see the glass as half full and not half empty?
A Synchronised Global Growth Trajectory?