Market participants who closely follow the headlines will be forgiven for thinking the last two months have been a non-stop barrage of negative news, with no shortage of reasons to panic. The actual outcome – major indices again trading within sight of all-time highs – seems somewhat incongruous, given all the doom and gloom of August. What has changed? In short: sentiment. After seeing a substantial collapse in bond yields in August, some recent data has pointed to the US economy being more resilient than expected. While the trade war is having an impact, it would seem the fundamentals – for now – still favour an expansion of the current economic cycle. As a result, bond yields have rebounded sharply in September, and equities have moved higher, although a different set of names have lead this rally.
To state my case clearly, I fundamentally believe that a combination of disinflationary advances in technology, ageing global demographics and increasingly insular trade policy will anchor interest rates at historically low levels; growth simply is not robust enough to withstand the impact of significantly higher interest rates on a sustainable basis. In September alone, 16 central banks have cut cash rates, with the ECB even going as far as reintroducing QE. Under this scenario of uneven global growth, low inflation and ultra-low interest rates, I strongly believe that companies that can organically grow their revenues and profits will outperform. As such, I believe the investment case for high-quality, industry-leading and structurally growing companies remains intact.
This month we have seen an equity market rotation from “growth” to “value” and “defensives” to “cyclicals”. Given the reversal in bond yields, it’s not surprising but I do not see the fundamental macroeconomic catalyst for it to be sustained. Fiscal stimulus could support a measure of reflation but I think investing on whether the political stars align to allow this to happen amounts to near-term speculation and is not a sustainable way to generate long-term outperformance.