Reduced political risk and positive corporate earnings present a constructive investment environment, says Anthony Rayner, and, while valuations are high, they do not necessarily indicate a market bubble
Important recent developments span the political, economic and corporate spectra. The eurozone political pipeline suddenly looks more positive, recent economic data releases suggest we have moved from accelerating growth to mature growth and the corporate earnings season has been pretty impressive.
As broadly anticipated, last Sunday the French elected a centrist, pro-European president. On the same day, Angela Merkel's party won convincingly in a state election. This is a small state but victory was unexpected and indicates a shift back to mainstream stability, which bodes well for Merkel in the German national election in September.
These events, combined with the failure of the far-right to win in the Dutch election in March, have stalled the populist, anti-EU surge that began last year with Brexit.
Not that this means the problems for the eurozone are over. A third of French voters voted for a far right candidate on Sunday and more than half of voters voted for extreme - left and right - candidates in the first round. The electorate still want change and reform - in France, as in the eurozone - has never been easy.
From a financial market perspective, however, political uncertainty has fallen sharply of late, and not just in the eurozone. Theresa May's surprise call for a general election in the UK should strengthen her hand and allow for somewhat cleaner Brexit negotiations, while markets seem to have moved on from Donald Trump and his tweets, with expectations much more realistic around policy action.
From a top-down perspective, the global economic environment is pretty strong. There have been some mixed numbers - not least the high-profile US first-quarter GDP number, although this is often below expectations and tends to get revised up.
Some of the survey data have softened of late - the notable exception here being the eurozone - but continue to indicate decent growth. The economic data releases suggest we are moving from an accelerating growth phase, to a maturing growth phase, while growth across regions looks less synchronised now.
From a bottom-up perspective, the first-quarter corporate earnings season tells a pretty positive story. Earnings have been ahead of expectations across most sectors and sales revenue has also been strong, as has forward guidance.
Aggregate market indices are still pushing record highs and volatility remains near record lows. Sector dispersion within equities has narrowed, as leadership is no longer broadly based across the economically sensitive sectors. Elsewhere, bond yields have come back a little from their recent highs in March, and commodities are broadly lower. In short, markets seem to be grappling with whether growth rates are peaking.
Late in the cycle
Reduced political risk, impressive corporate earnings and decent, albeit maturing, economic growth all feel positive. That said, we are late in the cycle, compared to previous cycles, whether measured by the current economic expansion or the length of bull market. So it is not just the pessimists who are wondering what might disrupt what seems to be a broadly supportive environment for equities.
More recent decades have tended to see cycles brought to an end through financial, not economic, overheating - perhaps as a result of more open capital markets. Assuming this continues, we must look for the next bubble, which requires leverage.
There are areas of leverage evident, for example, in China and in the auto sector, but the Chinese authorities are taking action, while the auto sector is exhibiting signs of excess but not on the scale of the sub-prime housing market that imploded 10 years ago. We continue to monitor excesses more generally.
The most frequent concern clients express is around valuations, which are broadly expensive on most measures. Valuations have not historically been very helpful indicators of when markets are likely to correct, however, as trends tend to persist. They are, we think, more insightful in understanding how much risk is being taken. So we have been more disciplined on valuations of late, in order to limit potential for mean reversion risk.
We remain broadly constructive on equities and continue to shift from pure cyclicals to our secular growth themes, while remaining more cautious on bonds, assuming a rising-rate environment.
Anthony Rayner is co-manager of Miton's multi-asset fund range
Joining London team
Previously at Old Mutual Wealth
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