Toby: Well, as temperatures are hotting up in the UK, let’s find out whether the same is true in the stock markets. This month I’m joined by our chief investment officer Will Hobbs. So Will, we’re a little over halfway through the year and it’s been quite a first half hasn’t it? One in pretty much everything went up, developed world equities have enjoyed their best first half since 1988 and to put that into context, that was a year when Who Framed Roger Rabbit? and A Fish Called Wanda were topping the charts. What’s been going on?
Will: Toby there’s a couple of points to make here: the first thing to bear in mind is the starting point for capital markets. Obviously when we came into the year, investors and capital markets were expressing a deep depression about the near-term outlook. A recession was seen as imminent, almost inevitable, and as the world economy proved those doubters wrong a little bit, it hasn’t entered a boom or anything but it certainly bounced back from some of that weakness, that meant that equities certainly did well. Now explaining why bonds did well is because actually also central bankers have taken a turn for the slightly more negative. They too are now a little bit more worried about the outlook and so they’re talking about precautionary interest rate cuts that proved, along with a few other things, a huge boon for bonds as well. So you found that stocks and bonds have risen in tandem and it’s been hard to lose money for investors in this first half.
Toby: So it interests me actually that you haven’t mentioned the trade war in your response. Now I know that Wimbledon has kicked off so should we just read into the fact that maybe the participants, the world leaders are just taking a step back to enjoy the tennis or is this truce a change in development. How is it impacting on your decision making?
Will: The trade war has been quite a difficult one obviously for investors and for the economy to digest and this is one of the reasons why central bankers have been becoming a bit more nervous about the outlook and the potential for a further escalation. This is not necessarily an area where we feel we have an edge and in a sense we’re looking at the outlook and the potential for a further escalation in tensions even if that looks less likely now. But to our purposes we’re focusing on a world economy that still looks fit for purpose and how assets are pricing around that reasonably fit-for-purpose economy. From our perspective it still looks like the bond market is very expensive in that context and we’re leaning against that in portfolios a little bit.
Toby: Now interestingly we’ve just passed another momentous milestone. So one could say the longest, positive US economic cycle since records reasonably began in the 19th century. Is there anything that we should be reading into that because it’s super easy for critics and pundits to say we’re long overdue a correction like somehow, there is a set length to a cycle and things are going to change. From what you’ve just said, it sounds like actually fundamentals are still strong and there is a little way to go. What do you think?
Will: I wouldn’t say that fundamentals are strong necessarily; they’re a bit weaker than what we would look for. But I think the major thing that’s arguing against an imminent recession in a sense is the health of customer number one for Global PLC and when we talk about that we are talking about the US private sector, US companies and businesses. Their underlying health is significant at the moment and that should be quite a big barrier to an imminent recession. It doesn’t mean it can’t happen but it means the probabilities are a little bit lower than some people are arguing at the moment.
Toby: Let me just stop you there. So if our viewers want to just check in on that, what’s the data point that you look at to check the health of the US economy, particularly consumer spending?
Will: There’s a number of things you can look at. For an overall US private sector, we look to the ISM Manufacturing and that talks about companies more than anything else but it’s a very good, one statistic barometer for the health of that US economy.
Toby: So that’s the Institute of Supply Management, that’s the one where if the number is above 50 then the US economy is in expansion, if it’s below 50 than it's contracting broadly. But you always talk about that as being of the indicators that we have, one of the only reliable, leading indicators, is that correct?
Will: Again, you want to be careful using the word “reliable”. Historically it has proven pretty prescient in most cases; it hasn’t predicted every single recession. There’s no such thing and I think that we don’t want to provide any false comfort that there is a single indicator that tells you everything you need to know. But if you were trapped on a desert island and you were tragic enough to want to know the health of the US economy then the ISM would be one certainly at the top of your list that you would look at.
Toby: So Will, from what you’re saying it doesn’t sound like investors have got too much to worry about, they can enjoy the summer at least. We will of course be back next month to explore what’s happened and we’ll have some Wimbledon results which we will dig into as well. In the meantime we look forward to catching up with you next month but if that is too long away for you then you can always catch up with us on our weekly podcast “Word on the Street” which is available on iTunes, Soundcloud and Spotify. We look forward to catching up with you soon.