Global Outlook & Strategy

The title for our 100th edition of the Global Outlook and Strategy publication is Passing the Baton. We have chosen this title to reflect the stage that we are at in investment markets following three calendar years of solid returns. Looking forward it will be important to recognise that future returns may be harder to achieve, reinforcing the need for broad diversification. This requires that investment portfolios are well diversified by geography and asset class and positioned in appropriately priced asset classes. With a sharp eye on valuations, we have taken the view that it is an opportune time to focus investments on more reasonably priced equity markets (including Emerging Markets and Japan) and reducing our exposure to the US equity market. To some extent we are drawing a partial line under the period of US exceptionalism that has been experienced in markets, especially in a market clouded with geopolitics. At the same time, we continue to recognise the macroeconomic environment remains supportive due to relatively full employment, supportive government spending, positive economic and earnings growth, and monetary policy moving back (through easing) from a tight stance in most economies.

KEY POINTS

• Financial markets had another positive quarter across equity and bond markets as the solid foundations in the global economy provided support.
• Equities were supported by earnings growth across a range of geographic regions. Investors looked to diversify out of the US with strong performances seen in Emerging Markets, Technology stocks in Asia, and the Japanese stock market.
• Central banks’ changed to a hawkish stance in some of those countries with elevated inflation such as Australia. The Bank of Japan raised interest rates to slightly moderate their loose policy stance. In contrast the US Federal Reserve is seen to ease rates further on the back of political pressure, the softer labour market, and the productivity revival the US economy is experiencing.
• Credit markets continued to be supported by high historical yields, a modest default cycle and continued economic and policy support for the asset class. Manager selection is key.
• We continue to emphasise the attractive opportunity to diversify portfolios by equity market, currency exposure, and asset class. In the equity market the lower valuations in Emerging Markets, Japan and Europe are accompanied by robust levels of earnings expectations, which continues to make diversifying into these markets historically attractive.