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Market View

A monthly market outlook from Sanlam Private Wealth

A PDF version of the market outlook is available.

 

A strong start to 2017, but is it sustainable?     

Equity markets made a robust start to 2017, with the US performing particularly strongly. Investors are buoyed by the prospect of increased government spending and potentially lower taxes, while unemployment rates continue to decline and worldwide deflationary fears have started to abate. This is leading investors to believe that the global economy is no longer as fragile as it was, and some are even talking of an economic boom.

Optimism abounds

There’s a lot of optimism out there, which has already been priced into global equity markets. So far, much of that optimism is built on belief rather than reality which in itself can act as an important driver of growth. Until now, companies and households have been hoarding cash, and this positive sentiment could be the catalyst that convinces them to invest, with powerful ramifications. That said, we must exercise caution. Valuations and margins across most geographies remain elevated, making further gains in stock prices incrementally tougher to justify. The US is particularly expensive and the recent surge in business optimism needs to be translated into higher levels of investment, supported by the proposed tax cuts and infrastructure expenditure, before these valuations can be justified.

Pressure on bonds

Meanwhile, government bonds remain expensive relative to their own history, even in markets that have experienced the greatest fall in prices. The combination of low growth, low inflation and central-bank activity pushed bonds to record low yield. While these pressures have not fully reversed, the direction of travel is towards higher inflation, higher growth and less central-bank intervention. That direction vindicates the very cautious outlook we have had, and continue to have, on core government bonds as they remain vulnerable to higher inflation and growth surprises. On the other hand, the improving economic situation means that corporates should be in a strong position to pay their debts. As a result, we’re favouring exposure to corporate bonds that offer a reasonable yield without being as sensitive to interest rates. 

A word on inflation

Global inflation is on the increase, largely caused by higher input prices, such as for commodities, and increased Chinese factory prices. We would like to see higher core inflation, driven by tighter labour markets and supply constraints, as this would lend more weight to the improving macroeconomic outlook that has everyone so excited. Inflation in the UK is likely to pick up more than other markets as weakness in the currency is now starting to feed through to the economy, although this too is not the demand-driven inflation that we want to see. 

Could this be the year for Europe?

In spite of the well publicised political issues, Europe appears to be showing signs of life:

  • For the first time since 2013, inflation has surprised to the upside

  • Company earnings for the fourth quarter of 2016 were surprisingly strong and continue to grow

  • The Purchasing Managers’ Index (PMI), which is an indicator of the economic health of the manufacturing sector, is firmly in expansionary territory (see graph below) – even in countries like Italy.

graph.PNG
 

Of course, the political uncertainty looms over the region – particularly with upcoming elections in France and the Netherlands.
But this is only one element of the European investment case, and the improving fundamentals cannot be ignored.

Where do emerging markets stand under Trump?

When Donald Trump was elected president, there was concern that the recovery in emerging markets may stall. Both the strengthening US dollar and the protectionist policies of the Trump administration could negatively impact economic growth in the developing world.

However, after a sharp selloff, emerging markets have steadily recovered and we think they will remain resilient. The valuations continue to be broadly attractive, supported by reasonable levels of growth. In many ways, improved economic performance in the US is likely to be supportive for emerging markets, not destructive.
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A PDF version of the market outlook is available.

This article is for information purposes and should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by Sanlam Private Wealth. Any expressions of opinion are subject to change without notice. Reproduction of this commentary is not allowed in whole or in part without prior written agreement from ‘Sanlam Private Wealth. Past performance is not a reliable indicator of future results. Investing involves risk. The value of investments, and the income from them, may fall as well as rise

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.