Barings: From “Now Here” to “Nowhere”

Marino Valensise, head of Barings Multi Asset team, explains the firm’s current investment strategy and some of the thinking behind it.

During the past two months, the behaviour of markets and commentators could be labelled as schizophrenic.

Investors have become concerned about poor communication from certain central banks, which have not covered themselves in glory. Their behaviour has planted the seed of doubt, and they have gone from being seen as omnipotent to unable to provide necessary clarity to the market. The latest change in Fed language confirms the uncertain direction of travel: any references to global, international and overseas developments (reported as a concern in late September) have miraculously disappeared from the Fed’s October statement. What a difference a month makes!

This uncertainty has also manifested itself elsewhere. As wryly noted by well-known strategist Ed Yardeni, a recent article in Business Insider arguing that “It’s time to start talking about a US recession” was followed a week later with “Six signs the US economy is nowhere near recession”.

From recession being “now here” to “nowhere” is quite a change of position. So, what is wrong with the US economy? In our view, not much.

A few decades ago, when I started managing high yield corporate investment portfolios, the mantra in the markets was 1.5%. If US real growth slowed to that level, we expected the value of our investments to go down rapidly, as defaults would increase exponentially.

The same concept, illustrated in an intellectually more elegant way, was even discussed by the Fed (by Dennis Lockhart in a speech and by Jeremy Nalewaik1 in a white paper, both in 2011). As an aeroplane which reduces its speed will eventually stall and come down, the US economy would go into tailspin if economic growth were to decelerate below 2%.

Although economies go in cycles, and it is in the natural order of things that an economy will go into recession from time to time, we do not think this is currently the situation for the US.

We have several times noted certain positive factors (consumption, services, lending) which have been supportive of the US economy. However, three items in particular have hit the economy and earnings in the last 12 months. These were the rising value of the US dollar (which led to turmoil in emerging economies and also took its toll on corporate earnings), the collapse in the price of oil and a generalised tightening in financial conditions.

As these problems seem to be waning, we anticipate a better tone for growth and an earnings per share recovery in the first half of 2016. Perhaps only back to mediocrity, but enough to avoid any dip below the “stall speed” of 2%.

Economy and market bears would not agree with us, pointing to two major issues.

First, they would note a collapse in manufacturing and global trade. In recent decades, we have looked at the world economy primarily through the lens of global trade, manufacturing and investment. If we were to persist in this approach, we would be disappointed. As we get older, our eyesight prescription usually changes and we need to adopt different lenses. Today, the nature of economic growth has changed too, and we need to look at it differently. Domestic activity, the service sector and consumption are increasingly important. These are all growing and will probably lead the economy in the coming quarters.

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