Recent Trends

What is behind it

Since our August update, the global stock market index again didn’t move much, with a recent (so far modest) correction offsetting the gains made in August. For the US markets, this was the best August for more than 30 years, with the S&P500 jumping by more than 7%, hitting new record highs and fully erasing its losses from the coronavirus pandemic.

Statistical economic data emerging in August was mixed. Purchasing Manager Indices indicate stronger growth in the US than in Europe; and also US retail sales were up vs a decrease in Europe where the north- south divide seems to be widening, with German, French and Dutch sales remaining above last year’s levels, while the Spanish, Portuguese and Greek figures stayed in negative territory. The US seem to be closer to the “V-shaped” recovery than Europe, but a number of indicators suggest that the recovery may be running out of steam both sides of the Atlantic. Almost two thirds of US consumers see the economic prospects as unfavourable. And, not unexpectedly, the noise around the November presidential election is getting louder.

It was yet again monetary policy supporting the markets: The Fed will drop its longstanding practice of pre- emptively lifting interest rates to combat higher inflation and has declared that full employment will no longer act as a trigger to raise rates.

What it will mean

What to expect – and what to do

This is not a small adjustment of Fed communication. This is a paradigm shift. If the Fed so far felt committed to monetary stability as well as economic growth, the focus is now on growth, and full employment. The inflation target of 2% will stay relevant only as a longer-term average. Zero interest rates seem cast in stone for the next five years. This dramatically increases the transparency of monetary policy and alleviates market concerns about interest rate rises triggered by inflation following the massive monetary and fiscal expansion.

Rising inflation at zero interest rates means negative real term interest. Investors will look for an alternative for bonds which don’t provide protection against inflation. This drives the price of “real” assets, like gold, property, and most of all equity.

The development of the coronavirus (and vaccines and treatments) will keep making an impact but we don’t expect a repeated covid-19 induced market panic. Governments look reluctant to return to a broad lockdown.

We expect further economic recovery – but slower, and with more setbacks.

Inflation protection is becoming more important – that includes gold and property, but even more than before there is no alternative to equity: Good companies are relentlessly driving costs down as we speak, and productivity will get a boost from the digitalisation of the economy. Already in 2018, the Alphabet CEO made this statement about Artificial Intelligence: “AI is one of the most important things humanity is working on. It is more profound than, I dunno, electricity or fire.” Whether you quite agree with that or not – it is hard to overestimate the importance of AI for our lives, and only now it is really starting to penetrate our economies. Companies facilitating these changes will benefit most. But also “old economy” companies will see record profits.

In the short term, we would not be surprised by a somewhat deeper market correction. It is overdue particularly for tech stocks. Maybe we have now seen the start of it. And it should be said that equity valuations are above longer-term averages. There is a price at which any stock is too expensive. But those averages have emerged over times of much higher interest rates. Relative to the alternatives, equity looks very attractive. We expect substantially higher equity prices over the next, say, 5 years. Investors who can tolerate the risk need to hold equity. Your financial advisor will help you to ensure that you benefit from the chances you can afford to take.


Disclaimer

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