Over the last few weeks, we have seen a resurgence in global growth concerns.
Firstly, the European Central Bank’s earlier-than-expected resumption of economic stimulus was not welcomed by investors.
This is in clear contrast to the US Federal Reserve’s pause in rate hikes which acted as a tailwind for global markets.
This dynamic emphasises the relatively perilous position the ECB finds itself in and the ongoing fragility of Europe’s economic recovery.
This was followed by disappointing labour data in the US and acutely underwhelming export numbers from China – which showed a month-on-month drop of 20 per cent.
While these numbers are volatile, it gave a grave signal that global growth is slowing more than expected.
On top of this, the Brexit negotiation spectacle rolls on, heaping uncertainty onto an already challenging macroeconomic outlook.
And finally, we face the threat of another government shutdown in the US over the funding for President Donald Trump’s wall.
Reasons to be optimistic
This is a finely brewed macro picture with plenty of lurking dangers and idiosyncratic risks. But amid the gloom, there are reasons to be optimistic.
A trade agreement between China and the US is still on the cards as Mr Trump seeks to land a deal to secure his legacy.
Meanwhile, M&A remains elevated – a number of large deals have been rumoured, from banks to semi-conductors, and we have seen large acquisitions in pharma and gold miners.
By aggregating total global M&A transactions over the last two decades, 2018 emerges as the highest in 20 years – and this year, so far, is set to match the record.
This buoyant backdrop for M&A should help support equity markets.
Global market fundamentals also appear to be on steady footing. For example, not only did 70 per cent of US companies beat expectations in the latest earnings season, 85 per cent of tech companies also surpassed analyst expectations.
Additionally, we believe there remains a lot of untapped support for the current rally. EPFR flow data for active and passive strategies show the recent rally has actually had little support, with net negative flows – and was fuelled mostly by short covering.
Broadly, investors have sat on the sidelines and have yet to participate; this could well provide another leg to the equities rally.
The crux of the situation for us is, while growth is slowing, there remain opportunities out there – and the performance chasm between value versus growth is a fertile bed of opportunity for active managers.
Globally, growth has outperformed year-on-year – with a cumulative outperformance of 31 per cent over the last decade. As active managers, it is our job to exploit the relative value which has been created by this price disparity.
