Written by: Mark Phelps Investors are increasingly asking whether the macroeconomic growth cycle still exists, and, if so, where are we in it? The answers to these important questions have real implications for the way equity investors should think about their portfolios. AllianceBernstein’s global economists recently downgraded their growth forecasts for next year. But, while the softer outlook suggests that economies and financial markets will be more vulnerable to the many risks they face, we continue to think a significant recession is unlikely. For some investors, this is just the problem. It’s been 10 years since the last global recession and the macroeconomic and geopolitical risks are intensifying. Although markets have been more volatile over the past year, stocks have continued to climb. Stormier weather seems inevitable. Small wonder then that investors would like some sense as to when the storm will break or at least some idea of where they stand in the investment cycle—and assurance that such a cycle still exists! With today’s complex market realities, there are no simple answers. It is possible, however, to look rationally at what these uncertainties mean for investment and to map out how investors might learn to live with them so that they can continue to invest effectively for the long term.
Developed Markets Are a ChallengePart of the uncertainty arises from the fact that developed markets—those with open, manufacturing-based economies such as Europe and Japan—are among the most exposed to the various risks (debt, demographics, low-productivity growth and the US-China trade war) affecting the global outlook. For most investors, developed markets matter. After all, China is no longer the engine of global growth that it once was and India, despite its potential, is unlikely to become a second China anytime soon. While there are some interesting trends to watch in some African markets, they aren’t likely to make a large impact on global growth. Developed markets are mature, however, and tend to grow slower than their emerging counterparts. Consequently, when growth and interest rates are low, as they are now, they are likely to stay lower for longer in developed markets than anywhere else. This helps make the cycle very muted, but a muted cycle doesn’t necessarily imply an absence of market volatility. In a low-growth environment, for example, it’s not unusual for the economic data to slip into negative territory for one quarter and back into positive territory for the next. A low-growth, high-risk environment can be a febrile one for investors, so it’s not uncommon for a single quarter of negative growth to be interpreted as a harbinger of recession and for investment markets to react accordingly. Conversely, a quarter of good economic data might be taken as a sign of recovery—another, albeit different, reason for markets to become volatile. Given that this is the reality investors now face, what sort of stocks should they think about owning?
In a world of relatively low growth, investors should focus on businesses that can continue to grow despite the complex backdrop