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Market View

Is a fast-growing economy as dangerous as it is exciting?


Ten years ago, when the world was in the throes of the worst financial crises we’ve seen since the Great Depression, today’s accelerating global economy seemed like an impossible dream. So, why is it that improving economic news is giving investors and economists the jitters?

The credit crunch reminded central banks of a core economic principle – don’t leave interest rates too low for too long as that allows risks to build. As economic data continues to impress, how fast and how far interest rates need to rise is sure to be keeping our central bankers awake at night – especially as they simultaneously start to remove the crutch of quantitative easing (QE). They must act decisively to prevent the economy from over-heating, whilst being careful not to stifle it completely.

Last month equity markets experienced their first major correction in two years, despite business fundamentals appearing stronger than ever. Once again, this proves that it is the valuation, not the story, that ultimately matters in investing.

Now that central banks are starting to wean the economy off QE, bond yields are on the increase, and investors are showing the first sign of nerves that higher yields could derail the Goldilocks economy we’ve enjoyed for so long. We’re not too concerned yet, as bond yields have a long way to go before they can truly threaten riskier assets, but we can expect increased market volatility as this correction works its way through the system.

The good news is that volatility brings opportunity, and we’ve already been taking advantage of some of the market moves we have seen, although nothing has changed sufficiently to alter our generally cautious view of the world.

Focus on… the US


The US is the economic power-house of the world. While its economy has been strengthening, the rest of the world has been benefitting, and it’s true to say the Americans have led the way to today’s positive global economic picture. If it’s possible for Trump to leave a positive legacy in his wake, then his economic agenda, such as tax reform, will surely be it. Large companies are starting to repatriate their money, and if Trump can deliver his huge infrastructure spending plan, we expect strong growth in the US and the creation of thousands of skilled labour jobs.

The biggest threat facing the US is its debt burden. Cutting taxes and increasing government spending means only one thing – more borrowing. If you add to this the hidden debt of the social security payments to the baby boomer generation, then the longer-term outlook is a little bleak. They need this economic growth to pay for all this debt.

“Global growth remains strong as the US and Europe continue to gain momentum, and China looks set to deliver excellent growth, even if not quite as exceptional as before.

It’s ironic that synchronised global growth is the reason that markets have begun to sell-off, given that tepid growth was a concern for so many years. We view the recent spike in volatility as healthy as it brings basic economic fundamentals back to the fore.” - Philip Smeaton, Chief Investment Officer

Investment view: Is property set to make a come-back?

Listed property has been somewhat unloved recently. Fairly high prices, and uncertainty in sectors such as retail (where the rise of online shopping has hit lower quality retail malls, especially in the US), has made it difficult to get excited about this asset class. However, as you can see in the graph, global Real Estate Investment Trusts (REITs) have fallen sharply this year, and we think there are good reasons to start looking at the property sector:

Index of Global property REITs (GBP)


Source: Bloomberg

  • Concerns about rising interest rates have caused prices to fall. With the average listed property now yielding 5%, we feel that the price has fallen to a level where the return expectations are reasonable. While we think the years of strong rental growth are behind us, we still expect growth of at least inflation in the dividends that are distributed to shareholders
  • One of the advantages of investing in commercial property is that long-term leases provide clear earnings visibility
  • Retail space is under pressure as consumers shift more shopping online, but we believe the best malls stand to benefit from this trend. Growth in online also provides other opportunities within the asset class, such as warehousing and datacentres.

At the end of the day, it always comes back to whether current prices make sense given the anticipated cash flows. In the case of property, we’re not yet at an attractive price, but at least it’s starting to look interesting.

News from Sanlam


We are delighted to announce that our Global High Quality Fund has won the High Growth Portfolio Performance award at the 2018 PAM Awards. These awards are some of the most competitive and well respected in the wealth management sector and are governed by a rigorous evaluation process, overseen by an independent panel of leading industry professionals. Achieving this accolade reflects the ongoing commitment of our team to providing a high quality and relevant service to our clients.

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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.