THE ECONOMY – GLOBAL UNCERTAINTY
After strong growth in 2017 and early 2018, global economic activity slowed notably in the second half of last year, economic data is inconclusive on the overall outlook, but global growth has clearly slowed reflecting a multitude of factors affecting major economies. In the midst of a global slowdown we have witnessed an escalation in the US-China trade war, Beijing’s Xi Jinping faces little threat to his presidency whereas all eyes will be on the United States presidential election in 2020, until then it is unlikely for there to be any respite in the ongoing dispute. Across the Atlantic, the situation is overshadowed by three of Europe’s largest economies, Germany, Italy and the UK facing the very real prospect of recession whilst the beating drums of Brexit resound ever louder.
Meanwhile, the Australian share market continues to represent excellent growth value having finally beaten its record high set nearly 12 years ago, prior to the global financial crisis. Conversely, the RBA has as expected, delivered back-to-back interest-rate cuts to new record lows in a drive to stimulate the economy.
With global economic uncertainty and signals for long term low interest rates, investors are actively seeking returns elsewhere which has rather curiously created an extreme divergence between the crowding in secular growth and perceived safe havens with investors shunning anything with even a whiff of uncertainty. This has resulted in stocks with perceived economic sensitivity or regional worries such as China being neglected and increased holdings for stocks in perceived safe havens, ironically resulting in overvaluations or at the very least driving stock growth.
When investors are uncertain about the value of financial instruments they typically default to the herding impulse; part of our evolutionary heritage that served us well in the past. However, it should be kept in mind that a consensus view isn’t necessarily the right one, it takes a healthy dose of scepticism and nerves of steel to resist the temptation to run with the herd, the same can be applied by an astute investor. Perhaps we should pay heed to Darwin’s maxim; adaptability, not strength, is the key characteristic of survival.