16 – FUND SPOTLIGHT
Maya Bhandari Portfolio Manager, Multi-asset
C H I N E S E WH I S P E R S
IN THE YEAR SO FAR, EQUITY CASH FLOWS, PROXIED BY EARNINGS GROWTH EXPECTATIONS, HAVE WEAKENED ACROSS EACH MAJOR EQUITY BLOC OR REGION, SHIFTING LEFT IN FIGURE 1. YET STOCK MARKET RETURNS HAVE RISEN – MOVING UP VERTICALLY – APPARENTLY SHRUGGING OFF THE WEAKER CASH FLOW PICTURE. In local currency terms investors across asset markets, including equities, have enjoyed the best start to a year since 2007, albeit after a nasty fourth quarter. FIGURE 1: EVOLUTION OF EARNINGS GROWTH EXPECTATIONS AND EQUITY MARKET RETURNS OVER PAST THREE QUARTERS
corporate earnings would verify recent optimism. China accounts for more than a third of world economic growth and at least half of demand for some commodity markets – so even a whisper of Chinese stimulus often does the trick. Will “this time is different” for how China influences the rest of the world? There is one reason to think it might be: the policy focus on deleveraging while meeting a growth target creates a dilemma, which may be a lot less helpful for other economies. As my former colleague David Lubin at Citi puts it: “Because of the credit-dependent nature of China’s growth model, it can’t reach those targets simultaneously. Increasing GDP implies rising indebtedness, which creates financial vulnerability; and increasing financial stability requires deleveraging, which threatens GDP.” A result of this is that China flip flops between the two inconsistent objectives, creating shorter and more volatile cycles. It is focussing on boosting consumption rather than credit-heavy investment, which alters the transmission mechanism from China to other countries. This is not to say there will be no benefit from Chinese stimulus, rather it may not be the previous “shot in the arm”. Clipping back overall risk in our dynamic fund range feels right, but we are mindful of developments that could alter our assessments on cash flows and discount rates. Portfolios are light on duration, using cash-like assets and low duration credit to anchor more volatile holdings including in EM Asian, Japanese and European equities. Find out more www.columbiathreadneedle.co.uk Note all article content is as at May 2019. Important information: For investment professionals only, not to be relied upon by private investors. Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Your capital is at risk. This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. The mention of any specific shares or bonds should not be taken as a recommendation to deal. The analysis included in this document has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. This material includes forward-looking statements, including projections of future economic and financial conditions. None of Columbia Threadneedle Investments, its directors, officers or employees make any representation, warranty, guarantee or other assurance that any of these forward looking statements will prove to be accurate. Issued by Threadneedle Asset Management Limited (TAML). Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com 1 We could add in dividends, but they tend to grow in line with earnings and nominal economic growth.
Source: Columbia Threadneedle/Bloomberg. Marker indicates 2 May, line shows history over previous three quarters starting end-Feb ‘19, end-Nov ‘18 and end-Aug ‘18.
What is going on? While earnings expectations are manifestly lower than a year ago, so too are the rates at which those future earnings are discounted. Between January and September 2018 these moved choppily sideways, stepping higher around February, while earnings expectations evolved favourably. But from October cash flows drifted a touch lower, whereas discount rates jolted higher – by nearly 200bps. This year, while cash flows have weakened more perceptibly, discount rates have fallen more and markets have rallied. Our forecast is for global economic growth to decelerate to just below consensus, and for slightly higher discount rates than those currently priced in. An improvement in growth and cash flows, meanwhile, is plausible. Global economic data have stabilised and earnings revisions are positive for the first time since autumn. Easing Chinese policy, which has clearly benefited China, positively affecting other economies and
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