One of the potential negatives he highlighted is the impact of the removal of quantitative easing in the US. While he does not believe that QE was unnecessary when it was implemented, he is less certain that the subsequent iterations of it where as important and he does not expect the US market to collapse when the liquidity scaffolding is removed.
“The rebound in profits was the largest cause of the rally we have seen in US stocks. Just because two things go up at the same time doesn’t necessarily mean the one wholly caused the other. I don’t expect profit margins to collapse from here. I think people have taken their eye off the profit bounce seen in US stocks, I think they expected profits to revert to the mean sooner than they have,” he said.
Part of the reason for this view, he explained is that the make-up of the index has changed, currently so-called, ‘old tech’ companies make up a far larger part of the index than they have in the past and these are companies that demonstrate much higher margins than other companies.
Gardiner said he is in the camp of people that believe the most recent financial crises were the culmination of a wave of liquidity crises that reflected excessive optimism and recklessness on the part of the financial services sector. And, as a result, is of the view that a muddle-through scenario for global financial markets is what investors should expect.
Europe is another area of focus for Gardiner. He said: “For many people at the moment, the view is that one needs to choose either to be invested in the US or Europe. We think both could perform well and want to be exposed to both markets.”
While he acknowledges that it is difficult to see the glass as half full in Europe, he points out that even in the best of times, the eurozone doesn’t grow very quickly , but added that capital markets in the region can do well even when regional growth isn’t particularly strong, if global growth is sufficiently strong.
“We are optimistic about eurozone capital markets. We think the ECB has been the fastest on its feet, which is particularly good given that their hands are tied.”
But, Gardiner does admit to being puzzled by the Bank’s belief that buying bonds is going to boost GDP.
“The drivers of economic growth are not financial in nature and I can’t see how their bond buying is going to leak into GDP growth. We are positive on the potential for Europe to grow from here, but that potential has more to do with whether or not countries like France and Italy fix the structural issues they face, rather than the number of bonds bought by the ECB
“Bank liquidity only becomes meaningful when people actually want to borrow,” he added.
