Underlying problems remain for global growth, says Newton’s James Harries
James Harries, manager of the Newton Global Higher Income Fund, believes that despite higher asset prices, the underlying challenges to global growth remain.
Despite the buoyant nature of equity markets over the past few months, the underlying problems afflicting the global economy remain; ultimately, not much has changed,” says Harries. “Strong financial markets seem to be the objective of policymakers around the world; while positive for investor sentiment, this is no long-term fix. Indeed, we are beginning to see signs of a return to pre-credit crisis behaviour with regards to credit spreads and emerging market debt issuance, while we are also seeing companies raise debt in order to pay dividends. The lessons have clearly not been learnt.
Investor risk appetite is at elevated levels considering that few of the structural growth problems affecting the global economy have dissipated; we are yet to emerge from the credit crisis era. As such, we believe that we are likely to see a period of lower returns and volatile markets and shorter economic and business cycles.
Authorities around the world are doing their bit to re-invigorate the global economy but the approaches being used are linear in thinking.
Interest rates are at close to zero and there are seemingly endless quantitative easing programmes; such action seems to follow the simple theory that if asset prices are pushed upwards, consumers will feel better and spend more, and the economy will recover. If only life were that simple.
While asset prices are elevated at present, we believe that global growth is in fact slowing. Furthermore, we worry about the unintended consequences of such policy; an approach that amounts to some sort of ‘financial repression’ in interfering with the free-market pricing of assets,.
Savers are being punished; the prospect of inflation and serial bubbles is being increased; we are seeing a mispricing of risk and misallocation of capital; while distortions are rife in the financial system. Against this backdrop, a degree of caution seems wise.
A ‘low return’ world
Although we are not anticipating a sharp ‘correction’ in the immediate future, we are resigned to a period of less buoyant equity markets.
Of course, there are areas of the market that we continue to find attractive; for example, we are positive on US banks given the recapitalisation efforts in the past few years, the diversified nature of the sector and its small size relative to that of the US economy. Meanwhile, we are positive on the US dollar given the relative vibrancy of the underlying economy, coupled with our expectation of further ‘safe haven’ flows given the struggles of other economies. On the other hand, we are wary of China’s weakening economic growth prospects, while the falling risk premia in emerging market debt suggests overzealousness and too much risk appetite given the prevailing economic environment.
Despite the stream of recriminations since the credit crisis, the financial architecture has not been radically restructured, and structural impediments to growth remain; any real rebalancing of Western economies is a long-term project which may involve going ‘backwards’ for a time before going ‘forwards’. This profoundly distorted backdrop still points to exercising a fair degree of caution. Our aim remains to be highly selective, with a focus on the least distorted securities. Some tolerance of higher valuations may well be appropriate (given that the low-interest-rate environment is likely to continue), but this must be viewed in the context of cashflows that are relatively reliable and sustainable in the range of scenarios that this volatile world can create.