The US market has become more complex. Earnings have been strong during 2017 but multiples are highly elevated, meaning there are increasingly fewer opportunities. One of the biggest risks for markets would have to be US equities. It’s more than 50% of the MSCI World Index, and where many people have more than half portfolios. The US has had a full market cycle so while there are some positives in the earnings outlook, there is also less going forward.
Inflection points in any cycle tend to be unpredictable and unexpected—and this isn’t just any cycle. The massive central bank stimulus required to recover from the global financial crisis has led to extreme conditions that heighten systemic risk. Central bank balance sheets have ballooned to unprecedented sizes, creating an inorganic liquidity backstop, the removal of which could threaten elevated asset prices. The Fed will run down its balance sheet, but will not do so aggressively; so, this should not cause particular concern but the unprecedented nature of this ‘normalisation’ means caution is warranted.
Global sovereign debt levels and government budget deficits appear unusually high—conditions typically associated with periods of crisis and conflict, but now an everyday reality that increases the risk of, among other things, an unexpected spike in inflation.
Having said that, one of the positives for equity markets globally is that, while many economies are moving into a phase of rising central bank interest rates, it doesn’t seem this will happen quickly and thus unlikely to negatively impact earnings and therefore the equity market. The process has commenced in the US and may begin in Europe in late 2018-2019.
As the global equity bull market matures, we believe bottom-up opportunities remain evident. In Europe, Asia and Japan, profits are still below where they were before the GFC. So, these markets still have relatively attractive multiples and the prospect for earnings upgrades.