INVESTMENT UPDATE

Monthly outlook end-October 2019

  • 22 November 2019
  • 5 minutes

Is the global economy heading for recession?

We don’t believe so – at least not in the next 12 months. That doesn’t mean, however, that the economic outlook is rosy. Action by central banks may prevent most of the world’s economies from shrinking in the year ahead. But, in our view, growth is likely to be much lower than we have experienced in recent years.

In its recent report, the International Monetary Fund (IMF) reduced its global economic growth forecast for 2019 to 3.0%. That would be the slowest pace of growth since the global financial crisis a decade ago. But that figure is only half the story. For advanced economies, the IMF predicts growth of just 1.7%, down from 2.3% in 2018.

In Asia, meanwhile, the IMF expects a 5.0% growth rate. That would preserve Asia’s status as the world’s fastest-growing region, but it’s still the slowest rate since 2007. And we should remember that Asia currently accounts for more than two-thirds of global growth.

None of this is good news for the stock market. Subdued economic activity often means individuals and businesses have less money available for investment. This can translate into low demand and low returns for shares. What’s more, central banks now have very limited room for manoeuvre: interest rates are already very low, so lowering them further would have limited effect.

With the steadying influence of central banks reduced, sharp movements in the values of investments appear more likely. Political and geopolitical events will doubtless provide plenty of bumps along the road too. A recent example of this came from the market convulsions that followed the September attacks on Saudi Arabia’s largest oil refinery. The effects of higher oil prices when the world’s economy is growing at 4.0% are likely to be less significant than when it is growing at just 3.0%.

Glimmerings in the gloom

So far, so gloomy. But uncertainty, volatility and pessimism make for the sort of environment in which we think smart investment decisions can pay off, especially if they are combined with a long-term focus. In-depth company research and meticulous stock selection become much more important than during times in which everything is rising, i.e. the environment we have experienced since 2012.

For example, the effects that new entrants are having on existing industries present an area of opportunity. Incumbents that have previously performed well might not be able to adapt. There is also the risk that companies may have become complacent because borrowing has been so cheap for so long. The recent rescue of property company, WeWork, provides a salutary lesson for businesses that are used to burning through readily available cash in the absence of profits. But there will also be opportunities in companies that can either alter an existing product or service, or adapt to the new ones.

Pockets of value

The concerns and uncertainties over Brexit mean that parts of the UK stock market appear to be undervalued. As a result, the FTSE All Share Index could contain some attractive opportunities for investors seeking income. Reinvested dividends contribute significantly to long-term returns for investors. The UK market’s total-price return since 2010 has been 35%, but with reinvested dividends, that figure rises to 90%.

We have also identified promising, dividend-paying companies overseas. We are finding good opportunities in Europe, the US and even in emerging markets, especially Asia. Over the past decade, there has been a real shift in the mind-set of emerging-market companies; many are now much more focused on rewarding their investors with dividends n the mind-set of emerging-market companies; many are now much more focused on rewarding their investors with dividends.

So investors should not be too distracted by what could be disappointing growth in asset prices over the next few years. There will certainly be ups and downs, but we think there also will be opportunities to discover overlooked and undervalued investments that could offer considerable potential for attractive long-term returns.

Forecasts of future performance are not a reliable guide to actual results. Investment markets and conditions can change rapidly and the views expressed should not be taken as statements of fact nor relied upon when making investment decisions. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.

Important information

Any views expressed are our in-house views as at the time of publishing.

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