Francis Sempill, part of Walter Scott’s BNY Mellon long-term global equity fund team, sees an uncertain market landscape ahead as we enter a new decade.
“There is no hiding the fact that the last ten years have been a disappointing period for equities; after all, world equity indices finished the decade almost exactly where they started,” he says.
According to Sempill, one of the most noticeable trends over the past ten years has been the way in which markets around the world have become much more closely tied together.
The most plausible theory to explain increased correlations relates to the globalisation of the biggest companies in indices, he says. In other words, the same global economic forces are influencing the biggest stocks in all countries.
A similar effect can be seen in the globalisation of capital flows, as money moves around global markets in search of regional valuation opportunities.
“With the trend towards increasing globalisation set to continue, it seems reasonable that market correlations will remain high for the foreseeable future,” says Sempill.
What might transpire over the next ten years depends heavily on how government and central bank policy stances are normalised around the world.
“The effects of zero interest rates, quantitative easing and massive fiscal stimulus, combined with the temporary boost of inventory re-stocking seen since June, may well have given investors a false sense of security that the global economy is out of the woods. It isn’t,” says Sempill. “Policy makers are walking the proverbial tight-rope; if they tighten policy too early, activity could collapse, if they ‘hang loose’ for too long, inflation may well be stoked as asset bubbles form.”
Sempill says markets could see a period of consolidation, or even declines, as investors face the facts that underlying macroeconomic and corporate fundamentals are not as healthy as valuations suggest.
“It seems implausible in the face of the massive shock taking place in labour markets and the bursting of credit and property bubbles that consumers will be able to contribute to growth to the extent to which they have become accustomed in the pre-credit crunch years.”
Developed economies have experienced their worst financial crisis since the Great Depression and the aftermath will cast a long shadow over the recovery. Given the deleveraging still to take place, growth rates are likely to remain weak for some time.
“This does not bode well for the 2010 and 2011 consensus global earnings estimates of 30 per cent and 20 per cent respectively. These are the growth rates that are currently being discounted by markets, and we believe disappointment is highly likely,” adds Sempill.
“That said, over the longer term, we take solace from the compounding power of equities – that a period of poor market returns is invariably followed by much better performance. We maintain our belief that a disciplined and focused stock picking investment approach can deliver results in excess of whatever the markets deliver, regardless of the underlying conditions. Investment is about long-term ownership of businesses and investors’ fortunes are inextricably linked to the underlying performance of the companies in which they invest.”