Global economy blossoms, while the UK falters

01 June 2018

As the global economy continues to enjoy strong growth, our macroeconomic outlook is one of cautious optimism. We’re optimistic because company earnings growth is good thanks to supportive US fiscal and monetary policy, and this trend looks set to continue. At the same time, interest rates in the US, Europe and Japan are still well below levels that could tip the global economy into a recession.

On the other hand, we are exercising a degree of caution because there are concerns that economic growth could be nearing its peak, and no-one can be sure how the large-scale reversal in monetary policy will play out over the coming months.

So far this normalisation in monetary policy has continued to push up US bond yields, and the Federal Reserve looks set to implement at least three interest rate hikes this year. We expect to see equities remain volatile as the market adjusts to this change, which could lead to good buying opportunities. The strength of the dollar has also caused some weakness in emerging markets making them particularly attractive.

With the US firing on all cylinders, we’re seeing an increasing divergence between there and the UK. The Bank of England faces falling inflation and a stagnating economy, which means they must hold off increasing interest rates, and getting the economy back on a surer footing. Ironically the UK equity market recovered strongly in April, as sluggish economic growth and falling consumer spending deferred the potential interest rate rise, and prompted Sterling to depreciate sharply, giving up most of the gains it had made last year. Weaker Sterling and a stronger oil price helped drive up UK equity prices in sterling.

So, while investors enjoy a global economy in full bloom, in the short-term we continue to expect volatility as the battle of rising bond yields versus a strong but diverging global economy plays out. Over the longer term, it’s important we position ourselves for the next stage of the economic cycle.

“The macro-economic outlook remains largely unchanged since last month. Global economic growth is set to continue, although perhaps at a more modest pace, and monetary policy remains supportive of this growth.” - Philip Smeaton, Chief Investment Officer

Investment view: The technology opportunity 

The technology sector is growing faster than the economy as a whole, and the outlook for investors is particularly attractive. Here are some of the reasons why:

Attractive valuation
As one of the highest valued sectors in the stock market (third only to energy and consumer discretionary), technology looks, on the face of it, expensive. The reality is that it is trading at a modest premium relative to the broader market, despite significantly better growth (both demonstrated and prospective). So, while it may look expensive, the premium to gain access to the growth in this sector is relatively low.
Strong, and cost-effective growth
As you can see from the graph, earnings from global technology shares have far outpaced the broader market. Unlike other sectors, once technology firms have invested in their capability, the speed of growth can be quick and the cost of growth can be minimal. Take Facebook as an example – the more users they add, the more they can earn in advertising revenue, but the cost of adding those users is next to nothing.


Business resilience
Businesses within the technology sector tend to have a greater resilience to threats in the macro-economic environment, mostly thanks to their strong balance sheets. Having a robust bottom line helps them to rideout a recession, and it also gives them protection in a higher-interest-rate environment. Intrinsically they have more money to re-invest in the business, and they can also buy start-up companies that threaten their market position. At the same time, the technology is embedded in society, and incumbent players have extremely deep barriers to competition - switching from iPhone to Android is a good example of this.

Even the risks are opportunities
Technology companies are faced with uncertainty around regulation. Data privacy and cyber security are immediate risks to this sector, but we believe that these developments entrench the position of the incumbents and make it harder for new entrants to compete.

Sanlam celebrates 100 years

On the 8 June, Sanlam celebrates its 100th anniversary. We’re incredibly proud of our legacy – starting with just seven founders in 1918 and growing to a global business serving thousands of clients in over 45 geographies. We believe our success and longevity is down to a relentless focus on client service and delivering financial peace of mind. We would like to thank all of our clients and connections for their continued support – here’s to the next 100 years.

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.

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