Consumers might do just as well to keep their investments in defensive or income-based assets over the coming months as the economic recovery is likely to be much slower than anticipated, argues CSAM's income manager.
Leigh Harrison, CSAM’s income funds portfolio suggests investors should now take a more defensive stance, as the "stabilities" of the perceived US economy are not as stable as many investors might believe, and bond yields are in fact much healthier than might usually be seen under an improving economy.
In particular, Harrison argues corporate profits will return only single-digit returns over the coming months – a profit margin which is suited to income funds - as the so-called US economy recovery is in fact only stable because the comfort zone has been “bought” by extremely low interest rates, a sharp rise in consumer and government debt as well as a growing US trade deficit.
Under "normal" economic conditions, investment markets would see a rise in bond yields and pressure on the curreny, however activities of the Far Eastern governments on currency trading have inadvertently altered the US market's stability.
According to a commentary by Harrison, low interest rates are driving a search for return which in reality are unlikely to be maintained. Even though stock market trading continues to focus on economic growth and rising profit expectations, this does not take into account the impact rising interest rates may eventually have, suggests Harrison.
"Either growth will remain strong - in which case interest rates will have to move up to more normal levels - or growth will start to slow, in which case investment markets will become more concerned about risk and the imbalances in the global economy. In either scenario, the maintenance of the current high level of risk tolerance seems unlikely and a more balanced perspective should emerge," says Harrison.
"In the low growth world, profits growth is likely to be modest for the majority of companies. The best returns will come from those few areas of secular growth or from those companies that recognise dividends are a key part of the total return and that as investment demands in the business generate progressively lower returns or the opportunities are fewer that increasing amounts of cash can be returned to shareholders as dividends," she adds.IFAonline
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation