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Developed Markets Equities under the spotlight

01 March 2019

3 minute read

The prospects for the US economy and what this may mean for investors.

Who's this for? Confident investors

What you’ll learn:

  • What are Developed Markets Equities
  • Recent market performance
  • The outlook for the global economy

When investing in Developed Markets Equities, investors are seeking returns which are linked to the profits and expectations of companies listed in countries that are classified as ‘developed’. In general terms, ‘developed markets’ mostly refers to Europe, the US and Japan. Investing across multiple regions provides diversification which often translates into a lower risk than investing in a single country. In this article, the focus is on the prospects for the US economy and what this may mean for investors.

In investing, many disagreements about price can be explained by different time horizons. An investor looking for shelter from various storms for the next 12 months may see much to like in a 10-year UK government bond offering little over 1%. However, an investor looking to invest for the next 10 years has little need of such shelter and would surely focus more on the threat from inflation.

The short term…

The market mood swings of the last few months have been out of kilter with traditional seasonal rhythms. December, usually a time for bonhomie and cheer, was a period of misery for equity investors in particular. Meanwhile, January and February, traditionally the months for introspection and a brief foray to the gym, have seen surging equity markets. Through all of this, the outlook for the world economy has not actually changed that much. If anything, it has deteriorated a little – the risks of a recession have heightened since the end of last year.

While we still do not believe a recession is imminent, our assessment of the various risks and opportunities over the next three to six months in the US, and indeed wider developed market stocks, is now a little less attractive than is currently being priced in by the market.

A longer economic cycle

These last few weeks have provided a few indicators that suggest the economic cycle could continue for some time yet. The proportion of working age Americans actively seeking employment has been rising over the last few months. If this trend continues, the US economy may well grow further without generating unwanted inflation. However, this slight pick-up in labour participation may not last. As such, it is a timely warning to those who try to time their investment in a diversified portfolio based on short-term market signals.

While the noise around Brexit is almost deafening to those based in the UK, long-term investors should continue to ignore such distractions. The long-term outlook remains promising and our trading decisions will continue to exploit opportunities in the market to deliver extra performance to portfolios whenever possible. These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

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