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Market View

US economy diverges from the rest of the world

 

Two useful indicators of economic growth are the Purchasing Managers’ Index (PMI), and the Institute of Supply Management Index (ISM). These indices give investors an insight into the health of manufacturing and supply chains – both of which are at the forefront of business and, therefore, the wider economy. As we review this data, alongside other performance measures, we’re seeing the US outperforming the rest of the world.

US growth accelerates, while the rest of the world moderates

As you can see from the table, the US has consistently outperformed other G20 nations throughout 2018. While the others appear to have moderated, the US continues to boom. Analysis of the ISM index suggests that this trend is set to continue.

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The reasons for this are well-documented. Increased public spending and corporation-tax cuts in the US have helped fuel an economic boom. We expect this to be reflected positively in company earnings well into next year. While a strong US market can have positive consequences for other economies – particularly emerging markets – in reality (as the graph below shows), US equities are leaving the rest of the world behind.

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What does this mean for investors?

In the short term, investors can continue to benefit from the booming US economy. However, accelerating economic growth could drive US inflation higher, forcing the Federal Reserve to increase interest rates faster than expected. This makes it more expensive for other countries to do business as well as service their (US-based) debt, and higher interest rates could lead US businesses to slow down investment and, therefore, growth. Monetary policy could quickly move from being accommodative to restrictive, and the economic outlook Source: Bloomberg could look quite different by the end of next year.

“There’s little indication of a global recession in the next 12 months, but we could see a meaningful slowdown by 2020. The current level of economic growth may be as good as it gets for this cycle.” – Philip Smeaton, Chief Investment Officer

Investment view: the use of alternatives for diversification

The current economic crisis in Turkey is a stark reminder of what happens when businesses and governments take advantage of cheap lending, disregarding how that debt will be paid off and whether the growth it is fuelling is sustainable.

Recently, so-called ‘alternative investments’ have been playing an increasingly important part in portfolio construction – a symptom of the unusual market conditions we’ve been experiencing over recent years.

What are alternatives?

‘Alternative investments’ is something of a catch-all term for investment vehicles that sit outside of the traditional asset classes in their purest form (such as equities, bonds, property and cash). Examples include hedge funds, structured products, managed futures and derivatives contracts. They’re not for the fainthearted and are mostly used by professional investors who have a large amount of research and technical know-how at their fingertips.

Alternatives are on the rise

Over the last few years, the returns from bonds and equities have become increasingly correlated, meaning they have both steadily increased in value over time. Investors with large allocations in these asset classes are at risk of sustaining losses should they plummet in value simultaneously. As a result, investors are gradually moving towards alternatives for diversification, and as a hedge against inflation.

Examples of alternatives

An example of an alternative investment are funds that invest in infrastructure projects, which build and operate facilities that form the backbone of an economy. Such projects often have government backed cashflows and are index-linked to inflation. This provides some certainty, even in difficult environments.

Another example are structured products, which can remain attractive in an equity market with limited upside, but where business fundamentals remain healthy. Though correlated in the short-term, in the longer term these instruments should deliver the prescribed returns to meet client goals, and they can add value to portfolios even when equity markets are struggling.

The Sanlam view

As investors of your money, it’s important we adapt to market conditions, ensuring your investment is achieving its objectives within your appetite for risk. Looking at alternatives is a good example of how we go about doing that.

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Sanlam is a trading name of Sanlam Private Investments (UK) Ltd (registered in England and Wales 2041819; Registered Office: 16 South Park, Sevenoaks, Kent,
TN13 1AN), Sanlam Wealth Planning UK Ltd, registered in England and Wales 3879955, and English Mutual Limited, registered in England and Wales 6685913
(Registered Offices: St Bartholomew’s House, Lewins Mead, Bristol, BS1 2NH), all of which are authorised and regulated by the Financial Conduct Authority.

The information and opinion contained in this market view 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 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. Any expressions of opinion are subject to change without notice.

Reproduction is not allowed in whole or in part without prior written agreement from Sanlam.

Past performance is not a reliable indicator of future results. 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.

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.