Over the past year, the evidence has built up that the global economy is enjoying a synchronised and better than half-decent recovery. Investors appear uncertain how to react to this good news, having spent much of the past decade bemoaning the anaemic rate of recovery from the 2008 banking crisis. Inflation remains generally low but tilting upwards, as faster growth uses up economic slack and increased demand has boosted the price of many commodities. For a long period, disappointment on growth was offset by record low interest rates and the monetary experiment of QE, providing liquidity which boosted the values of all financial assets but was slow to spur faster activity. Negligible deposit rates encouraged investors to deploy funds to bond and equity markets which became unusually highly valued, particularly government bonds.
Now that the spigots are being turned off and the cost of money is rising, investors are simultaneously twitchy that markets might be undermined by liquidity being diverted to fund growth in the economy (rather than boosting financial markets) or that interest rate rises will undermine growth.
It is as if a patient kept on life support has improved sufficiently to be discharged but is worrying about having to cope with normal life rather than celebrating their return to health. If financial markets are concentrating more on competition for funds and the cost of money, this is a sign that the need for emergency treatment is over and that the real economy, the fundamental driver of value for equities, is improving. This is no more a problem than saying increased longevity is an affliction because people’s savings have to last longer.
The recent improvement in company profits has helped to justify rises in markets whose values had run ahead strongly during 2017, despite which many equity markets hit an (overdue) air-pocket in February. This seems a healthy reminder of risk, as periodic setbacks allow an opportunity to reflect and shake out excessive speculation. Currently, the relative valuations of equities against bonds remain below long-term averages so, with positive growth and improving corporate results, time appears on the side of the patient equity investor, although there are no windfalls from valuation measures.
At Witan, our managers concentrate on selecting companies they feel will benefit from future growth in the global economy, whose prospects they believe are underestimated or mispriced for some temporary reason. They are guided by the adage that whilst in the short-term the markets are a voting machine in the long run they are a weighing machine. Paying attention to the wider investment climate is also part of our task as stewards of shareholders’ capital, although being buffeted by squalls is an inescapable part of equity investment. So far, 2018 has been more volatile than 2016 or 2017, which appears to be a transition associated with a better economic backdrop and a return to markets which are no longer dependent on life support from central banks. In our opinion, this convalescence should be celebrated.
Please remember that past performance is not a guide to future performance. Witan Investment Trust is an equity investment. The value of an investment and the income from it can fall as well as rise as a result of currency and market fluctuations and you may not get back the amount originally invested.