The ending of QE is going to present a challenge and makes the idea of strong corporate profits growth pretty unlikely in our view.
However, the weak growth environment means that even if QE is removed, low interest rates are going to be with us for some time, a prospect that augurs well for equities. So, while we expect growth to be modest, the combination of low interest rates, attractive valuations and yields make equities compelling at current levels.
The markets we are positive on are the UK, because it is a truly global stock market with a high percentage of overseas earnings, and Japan because we believe that ‘Abenomics’ has the potential to produce a seismic shift in the economic and corporate outlook.
But there are significant risks: times are challenging for emerging markets and a stronger dollar is a significant headwind although valuations have reached a level where it would wrong to be too bearish about their prospects, particularly as the long-term economic growth fundamentals are still quite attractive.
However, the short-term turbulence as growth forecasts are reduced and inflation fears increase suggests some short-term caution.
In terms of the themes that are driving markets, QE has been a huge positive for risk assets but clearly it will not last forever.
Markets and economies will eventually have to adjust to a world without QE and, importantly, with normal interest rates. Even discussing this policy shift has unsettled investors in the short term and increased market volatility.
Persistently slow growth due to ongoing deleveraging, and the unfavourable demographics in much of the developed world, will make a challenging backdrop for companies in many markets and we think that there will be no easy wins for businesses in the world that we now find ourselves in. This should inform and shape the kind of investment strategies that investors employ.
We also expect the search for yield in a low-interest-rate world to continue and to remain a major driver of equities. But it is vital to focus on valuation, as there have been moments in the past six months when the search for yield became something of a scramble.
Finally, in a tough world, we think that strong companies will continue to get stronger.
