The global economy, political scene and the business cycle are virtual, rather undefined entities that get measured and assessed by different people and organisations in different ways. We know that changes happen that will alter the value of our investments, but the process is continuous, not linear and often only accurately observed with hindsight.
When I comment on markets, I try to look forward, using my experience and knowledge of the underlying processes to take an educated guess at what is coming next. Before I commit to an opinion, the first thing I do is think about what I know now, right at this minute. In simple terms, I do an instrument check, like an airline pilot would before executing a take off, landing or major manoeuvre.
The readings change, of course, over time much as they would when a plane is climbing or descending, so my predictions vary.
That may seem contradictory, but remember that a well constructed portfolio. once in place, is designed to cope with the short term variations and will deliver in line with its objectives over the longer run even when the facts change in the shorter term. It may just need a bit of course correction.
The short term readings are more of immediate interest to those with new money to invest or who are carrying out a formal portfolio review, to see if a course correction is now appropriate.
I thought it would be useful to highlight in this short post the key instrument readings I can observe at this point in time:
- Interest rates across the globe are more likely to go down than up – making fixed income a more rewarding investment short term.
- In broad terms, global equities are not cheap but taken as a whole with potentially lower interest rates, they are not ridiculously over-priced.
- Inflation is subdued, helpful to central banks in setting lower interest rates. Employment growth is possibly slowing, with the effect of that usually being less inflation pressure.
- A brake has been applied to hugely over valued IPOs and at least a modicum of common sense about new issue pricing may have taken hold.
- Markets have almost got used to pricing in the risks of Brexit and the ups and downs of US/China trade talks – the economic effects have in many ways already fed through, so are partly ‘in the price’.
- A new and hard to measure risk to markets, especially in the Asia Pacific region is the political uncertainty in Hong Kong.
These are the main facts. There are other readings in my peripheral vison, but apart from the last bullet point, these readings make me a little more optimistic than I was a few months back. The Hong Kong situation would prompt me to reduce my market exposure temporarily to the Asia Pacific region, just as one would throttle back cautiously if one saw a temperature gauge heading for the red over heat zone .
