Nine Reasons for Investors to Be Optimistic
There are good reasons for being optimistic as an investor. One is the self-fulfilling prophecy. But even hard facts speak for a positive stock market performance over the next few years. Inflation is weak and the global economy should continue to drive the prices of equities.
Recently, the closely watched ISM index of US purchasing managers surged to its highest point in 13 years. The eurozone’s PMI purchasing managers’ index also reiterated its August high. Industrial production in Europe is reporting its strongest monthly growth in 79 months. China’s economic expansion this year is beating even optimistic expectations.
Growth drivers include consumption, infrastructure, fiscal spending for energy, water supply, roads and defense. Further impetus is provided by a USD 2,000 billion annual increase in bank loans to USD 17,500 billion. And the People’s Bank of China, with an investment portfolio of USD 5,200 billion, is no babe in the woods either. Even in South Korea, it’s not rockets, but the latest export statistics that are shooting skyward, as shown in the following figure.
Good Reasons to Invest in Equities
This momentum ties in with our global economic assessment made at the beginning of the year. It also affirms the message of the bestseller “Triumph of the Optimists” by financial markets professors Elroy Dimson, Mike Staunton and Paul Marsh. Over the long term, optimistic entrepreneurs and investors are more successful than pessimists, because the power of a self-fulfilling prophecy is built into optimism. Despite all the discouraging news headlines, optimism stems from a basic human need. Not least, it also gains support from the progress of his tory and the long-term success of the financial markets.
Today, there are still good reasons for investors to be optimistic:
1. The world economy is on track to experience the strongest upswing, with the lowest inflation, in 20 years. It is powered by the globally synchronous consumption and investment dynamic, supportive monetary and fiscal policy and an unusually liquid capital supply.
2. Positive yield curves indicate that investors do not expect a recession for the foreseeable future.
3. On average, pension funds only have an equity allocation of nearly 30%. This is (too) little, given their target returns and in historical comparison.
4. The average earnings yield for companies still exceeds most borrowing costs. Even when share buybacks taper off, they will remain a key driver of equity purchases.
5. Central banks reward the bold. Inflation is so low that they have no motive to apply the monetary policy brakes, nor is it in their interest to do so. Rather, they are aiming for a credible communication of their long-term normalization strategy – with emphasis on «long-term». Meanwhile, their investment portfolios have surged to over USD 15,000 billion, nearly USD 1,800 billion more than a year ago.
6. Western banks report their highest average capital base in 35 years. No wonder that global credit approvals – which have dampened growth in recent years – are now back in a rising trend.
7. Fiscal policy, where austerity measures trimmed nearly 7% from global gross national product from 2011 to 2016, has shifted into forward gear. It is making a significant contribution to global growth this year.
8. The 50% decline in prices for crude oil and mobility has been a boon to consumers, saving them more than USD 1,500 billion since 2015.
9. The rally in stocks, bonds and real estate boosts the financial confidence of many savers. US shares alone have gained nearly USD 24,000 billion in value from 2009 to today.
We expect most asset classes to generate positive returns over the next five years.
Burkhard Varnholt, CIO Swiss Universal Bank / Deputy Global CIO
Economy Expanding with Virtually No Inflation
A billion here, a billion there. Ultimately the many small and large amounts add up to a powerful force for further growth. We forecast global expansion of +3.6% (which corresponds to some USD 2,500 billion) in 2017, and another +3.6% (= USD 2,600 billion) in 2018. How long can this synchronous rally last?
While every upturn typically contains the seeds of the next downturn, the picture looks different this time. This is because growth generally stimulates inflation, which triggers a response from the monetary policy brakes, which initiates the next downturn.
But at present, the economy is expanding with virtually no price growth. We forecast a decline in average global inflation from 2.8% to 2. 7% in 2018. For this reason, the current upturn could persist well into 2019 – thus becoming one of the longest in history.
Stock Markets Likely to Benefit from Upsurge
Does this also apply to the stock markets? It very well could. Yes, the bull market in force since 2009 has been interrupted by 47 panic attacks and two lengthy pauses (2011 and 2015). However, an optimistic market outlook for 2018 is still, surprisingly, a contrarian stance compared to the current positioning of institutional investors.
The main findings from our «Capital Market Assumptions» (CMA) – our expectations for the economy and the financial markets over the next five years – underscore this view: although the current economic cycle is already several years old, very few factors indicate an imminent reversal. In particular, there is little likelihood of a recession.
So, regardless of the expensive valuations, the markets still offer positive risk premiums, and we thus expect most asset classes to generate positive returns over the next five years.