Global Economic and market outlook

For those looking for a balanced, rational, and insightful view of the global economy and outlook for financial markets, this article is worth reading.

 

I don’t normally post economic views on Kiwi Investor Blog as they are readily available. The quality of these views can also often be questioned.

It is also easier to find articles of doom and gloom, as they are more often promoted by the mainstream media, they attract more headlines.

 

This interview with Peter Berezin, of BCA, is the exception to the rule.

BCA’s Chief Global Strategist, Berezin, is not worried about the current weakness of the global industrial sector. If anything, he expects the global economy is going to see a revival in growth over the next few quarters.

As the article outlines “Falling interest rates and the service sector which is cooling but still expanding give Berezin grounds for optimism. He considers the trade dispute to be the greatest risk. But he believes that both the US and China have an interest in reaching a deal before the next US presidential elections.”

“Berezin prefers equities to bonds. In the longer term, he expects painful losses for the latter because central banks underestimate inflation risks……..”

I’ll quickly summarise Berezin’s thoughts below, nevertheless, the article is well worth reading so as to form your own view and to be informed.

In summary Berezin made the following comments and observations:

  • He does not see the global economy heading for a recessions, as noted above if anything, he expects the global economy is going to see a revival in growth over the next few quarters. Financial conditions have eased significantly over the last six months largely due to the decline in government bond yields. Historically, easier financial conditions tended to translate into faster growth.
  • Provided that the trade war doesn’t heat up significantly, the global manufacturing sector is going to rebound later this year. That’s going to drive global growth higher.
  • He does not see any glaring imbalances in the US or globally that gives concern to a recession, noting the private sector globally is a net saver.
  • The trade dispute between the US and China is the biggest risk to his view. China is stimulating their economy.
  • He believes both parties have an incentive to cool things down – Trump so it does not do damage to the economy and his election changes. China – likewise so not to damage their economy, also they don’t like the prospect of negotiating trade if Trump does win the election and also if he doesn’t win the election – the Democrats are likely to be tougher on trade than Trump.

 

The above provides a taste, the article also covers the outlook for oil, inflation, and risk of regulatory impact on the large US technology companies.

 

What should investors do?

Berezin recommends investors to overweight equities relative to government bonds over the next 12 months. “Stocks are not particularly cheap, but they are certainly not very expensive either. The MSCI All Country World Index is trading at around 15.5 times forward earnings which is not too bad. Outside the US, stocks are trading at close to 13.5 forward earnings which is actually pretty cheap.”

Looking forward, his preferred regions are away from the US and towards the emerging markets and Europe.  This is subject to a pickup in the global economy.

In relation to Fixed Income (bonds), he sees “an environment in which government bond yields are rising”. This is a negative environment for bonds (as yields rise, bond prices fall).

 

It is worth noting that 2019 is turning out to be good year for investors, particularly those invested in a “Balanced Portfolio”, 60% Equities and 40% Fixed Income. Global equities have returned around 18% since 31 December 2018, likewise returns on New Zealand and Global Bonds have been around 8-10%. This follows a very hard year in 2018 in which to generate investment returns, with the possible exception of New Zealand equities.

Returns on a one year basis include sharp declines in global equity markets over the final three months of 2018. These negative returns will start to “unwind” out of annual returns so long as equity markets remain at current levels.

 

Happy investing.

Please read my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

Global sharemarkets fall sharply – what to do?

The run of sharemarket records has been broken.

After reaching all-time highs and experiencing the longest period in history without a decline in value of more than 5%, US equity markets have fallen the most since 2011, the most in 6 ½ years.

The sell-off comes after: a record start to the year, +5.6% (the market has retraced all of January’s gains), a strong US employment report on Friday, including a larger than expected pick-up in wage growth, and rising US Treasury yields over the previous days.

Combined the fear of greater than expected increases in interest rates by the US Federal Reserve (Fed)), high market valuations, and an over brought market (technicals) sentiment has turned quickly, leading to the sharp fall in the market over recent days. More may be likely – who really knows?

Nevertheless, a pull-back in the market has been long overdue and the underlying fundamentals remain good e.g. global synchronised growth

What to do in times like this? Listen to your investment advisor, ensure you have a truly diversified portfolio, and take a longer term approach.

This article is timely given the recent market volatility.

It highlights Goal-Based Investing and 4 other trends to look out for in 2018.

I hope the people that are advising you are across these topics, in particular:

  • Goal Based investing – this is key focus on this Blog site. This is fundamental.  The focus on how much growth assets one should have, a return and benchmark focus, and target date type funds may not deliver desired outcomes to meet retirement needs;
  • Responsible Investing. A responsible investing and ESG framework / policy is important for sustainable investment outcomes;
  • Uncertainty – well that has certainly risen over the last couple of days! Nevertheless, it was in the background given the very low level of interest rates and the high valuation of equities, the US in particular. The article points to the increasing allocations to alternatives as a means to truly diversify portfolios and make them more robust in the face of market uncertainty and volatility.
  • It is likely that ETFs could play an important role in meeting investment objectives

 

Bitcoin has lost its shine!

 

 

Please see my Disclosure Statement

 

Portfolio Diversification

2018 is shaping up to be a tougher year for portfolios compared to 2017. Albeit the year has started well.

Longer term we appear to be entering a low return environment. This creates some challenges for the industry and investment portfolios.

This article articulates these challenges well and expands the discussion into the potential role Alternative Investment Strategies could play in an investment portfolio.

Amongst the good points the article makes, a couple stand out for me:

  • Focus on the risks in the portfolio (which is not necessarily the categories of the assets)
  • We are at the mercy of what markets deliver in terms of return; that cannot be controlled. BUT, risk can and must be managed to the level consistent with the investment goals.

 

With regards to Alternative Investment Strategies, as the article says, they must receive serious considerations.

Alternative strategies sometimes offer the way to gain true portfolio diversification and reduce the dominance of listed equity investments within a portfolio.

I mean “true portfolio diversification”. This is harder to attain than is often claimed. For example the addition of listed property and listed infrastructure into a multi-asset class portfolio offers limited diversification benefits. They are after all sectors of the broader listed equity market, which the multi-asset class portfolio will likely have exposure to. These equity sectors will largely behave like the rest of the broader equity allocation, particularly at times of financial market stress. Thereby offering no true diversification benefit. They may diversify your “equity” exposure, but provide limited diversification to a multi-asset portfolio. Listed Property and listed Alternatives are not alternative investments or strategies, they are equities.

I have witnessed in the last year Portfolio’s “diversified” out of the broader equity market and into list property and infrastructure as a means to enhance portfolio yield and diversify the portfolio. Never chase yield. The performance difference between the broader equity market and listed property and infrastructure is 10-12% over the last 12 months. Thereby a very costly result in an effort to “diversify” the portfolio. The diversification benefits of which will also disappoint over time.

These actions reflect a poor approach to portfolio construction and portfolio risk management, particularly relative to a set of future liabilities and investment goals.

 

 

Please see my Disclosure Statement

 

Robust Investment Portfolios

Happy New Year

As the New Year begins, a year that is likely to be a bit tougher than the last, it is good to reflect that the right investment focus is being maintained.

Most of the discussion within the Investment Industry is on the inconsequential and often to short term in focus.

I have had the honour of managing and determining the investment strategy for a large Australasian insurer.

There is lot to learn from managing insurance portfolios, not the least focusing on the right investment goals, understanding risks and the level of tolerance for risk, appropriately benchmarking what success looks like, and taking a longer term perspective.

These issues are well articulated in this article.

Build robust investment portfolios. As Warren Buffet has said: “Predicting rain doesn’t count. Building arks does.”

Therefore, make sure your investment portfolio is an all-weather portfolio and the ongoing debate and focus is always on the consequential.

 

Please see my Disclosure Statement