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Bringing you news, views and analysis since 2013

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Newton’s Iain Stewart sticks with bear necessities

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Iain Stewart, manager of the Newton Real Return Fund, says there are clearly reasons to have been cyclically bullish, but that a degree of caution remains the order of the day. 

“Investors can be broadly placed in two camps: the ‘cyclical bulls’ and the ‘structural bears’. The global economy is in the process of recovering from its sharpest shock for generations, interest rates are low and governments are providing sustained stimulus and rhetoric suggesting that loose policy will remain in place for the foreseeable future,” says Stewart.
 
The cyclical bulls adhere to the view that official policies globally have combined not just to avert a near disaster in the wake of the financial crisis, but to drive increasing expectations of an entirely new cycle of economic growth with analyst expectations pointing to a recovery in profits not dissimilar to that seen in the wake of the milder post-war recessions. 
 
The cyclical bulls recognise that growth is a challenge, but nonetheless believe that all economies need to find a way of generating it and will set policy accordingly, to the benefit of financial markets; if sustainable growth can be attained, debt burdens can be serviced more easily and addressed over time.
 
In the eyes of the structural bears, the world’s challenges are summed up in three small words: too much debt.

“The total level of debt in the US and UK has actually risen since the onset of the credit crisis and the flood of fiscal and monetary policies has merely provided short-term breathing space and served to advance future demand. Furthermore, these policies do not tackle the level of debt or even encourage a change of culture,” says Stewart.
 
“From investment banks and the bailed-out mortgage agencies in the US to football clubs in the UK, via Dubai, Kuwait and the olive belt of Southern Europe, the list of potential ‘debt dominoes’ is a long one. The scale of the potential risks to economic growth and market sentiment is indicated by the capacity of these participants to cause significant market ructions at a time when global interest rates are artificially low, making it by no means certain that the threat to the ‘status quo’ will only materialise if and when interest rates are raised.”
 
The structural bears see the achievement of sustainable growth as more of a challenge. The world has experienced many years during which Western consumption outpaced incomes, culminating in the biggest credit-driven consumer boom ever witnessed.

“It isn’t hard to believe that the real sustainable level of activity, in the absence of another credit bubble, might be somewhere below the peak level achieved in 2007. Indeed, history shows that significant deleveraging and slower growth nearly always follow the bursting of credit bubbles, suggesting that a swift return to robust growth is optimistic to say the least,” says Stewart.
 
“At Newton, our strategy is founded upon less ‘black and white’ judgments. That said, although we sympathise with elements of the ‘cyclical bull’ case and are pragmatic enough to incorporate its influence into portfolio construction, our thematically-driven process naturally drives us to focus upon what we see as important structural issues. 
 
“We believe that the world’s inherent challenges point to substantial risks for investors, and to the potential for further severe economic and market volatility. Against this backdrop, the possible outcomes are endless, and the scope for divergence between assets, currencies, sectors and companies is extreme. Although joining the ‘cyclical bulls’ in full flight has its attractions, ‘take care and be selective!’ remains our mantra.”

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