‘Death by PowerPoint’ is an ever-present danger at strategy roadshows. Audience participation helps keep it at bay. Recently I’ve asked for a show of hands on two questions. The first is: ‘Who thinks the global economy is in great shape?’ The rolling 12-month response is approximately nobody. The second: ‘Can you name a time when the material conditions of life for the average person on the planet were significantly better than today?’ Here too the response is negligible.
The point this illustrates is the importance of context and perspective in the investment debate. Everyone is aware that in some sense the global economy is troubled. At the same time, they are also aware that in an underlying sense (say the ability to shelter, feed and clothe the average human) it’s really doing rather well.
Investors are currently focused almost exclusively on growth, and the news here has of course been poor. In the fourth quarter for example, UK GDP fell by 0.2%, and we estimate Eurozone GDP fell by a similar amount. Even the US economy grew in all of 2011 by only 1.7%. But the level of economic activity is overlooked, and the average standard of living is likely still very close to an all-time high.
Sometimes the differing perspectives become very visible – a good example isJapan. First time visitors arrive having read about Japan’s ‘lost decade(s)’ of growth, and its large budget deficit. What they find are startlingly high levels of efficiency, infrastructure and all-round material well-being (to say nothing of general civility).
But if the focus on short-term growth rates becomes too intense, some asset prices can diverge a long way from those warranted by the underlying level of (say) corporate profits or solvency. To some extent, this is what we think has happened of late. The divergence may represent a longer-term opportunity: at some stage those levels may start to exert a gravitational pull back towards more appropriate valuations (though Japan is not our favourite investment currently).
Actually, even the growth debate may be taking on a less negative tone. Some important forward-looking indicators in the big developed economies have been drifting higher in the last three months. This week, we saw key manufacturing surveys in the UKand even Continental Europe beat expectations. If next week’s US ISM new orders index were simply to maintain its prior level, our composite ‘G3’ manufacturing indicator would rebound to the highest level since April 2011 – a quarter of a standard deviation above its long-term average.
Meanwhile, in response to the ECB’s massive intervention, the euro crisis – which is largely and understandably responsible for that short-term, incremental focus – may be (as we thought it would) showing signs of stabilising. The interbank spread has drifted back down to levels not seen since October while Italian, Spanish and Irish 10-year benchmark bonds are flirting positively with 6%, 5% and 7% yields respectively.
Renewed volatility is still likely. Another EU summit looms, with Greece, and perhaps Portugal, still capable of disappointing. Tensions remain in the Gulf, and the political situation in France is sparking investor questions. But the positive start to 2012 by risk assets is not without foundation, and we continue to recommend that long-term balanced portfolios hold more risk assets and fewer government bonds than usual.
Kevin Gardiner, Head of Investment Strategy EMEA
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