Contrary to other fund managers who have predicted 2017 will see the beginning of the end of the lower for longer global growth trend, Stewart argues growth “is likely to remain low and even trend lower in the future.”
“Global economic growth has been trending downward since the 1970s,” he said. “There’s been enough noise to disguise this trend, such as the abnormally high 4% to 5% growth of the very late 20th century, for example, but one could argue that the true trend is seen in the approximately 5% global growth in the 1970s, and the fact that it has slipped down to about 2% now.”
Stewart says it is all about perspective. Though the current rate seems low relative to previous decades, this could in actuality be the new normal.
The fact that investors are treating the lower for longer trade as a temporary economic condition also helps to explain the unrelenting impulse to hunt for yield, which Stewart believes will remain a key trend of 2017.
“But if the “normal” environment is one of lower returns from all asset classes, security selection suddenly becomes more important,” he explains. “For example, if an investor has enjoyed underlying asset class returns of 10%, it doesn’t matter what the specific investments are. However if the returns drop to 3% or 4%, the investor would want to make sure that they buy the few securities that have the potential for the most return. This could lead to a shift back to active management.”
This type of careful security selection is especially helpful on the equity side of things, argued Macquarie head of equity quantitative research Sharon Hill, where valuations remain at historical extremes.
In her view, China, Russia and the UK represent the most attractive markets in terms of valuations.
