Kames’ Goddin: Goldilocks or just too early for the bears?

A bear market in 2018 seems unlikely after a year marked out by a ‘Goldilocks’ environment, according to Kames’ global equity manager, Neil Goddin.

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Triggered “nearly always” by a tightening of monetary policy in reaction to rising inflationary pressure, Goddin said inflation looked set to remain historically low into next year, despite its recent rise, making a recession unlikely and keeping the bears at bay.

Goddin, co-manager of the Kames Global Equity and Equity Market Neutral Funds, said: “Risks are rising but a bear market seems unlikely in 2018. The concerns include an already mature economic cycle and a long, but largely hated, equity bull market leading to stretched valuations. But these factors alone are unlikely to kill-off the bull market.”

Similarly, “major drawdowns require triggers”, Goddin said.

“The worst are a consequence of the unwinding of major economic imbalances, typically a financial bubble. With pre-crisis imbalances largely reduced or shifted to the public sector, we see this risk as low.”

Pivotal year

Goddin marked 2016 as a year that was an “inflection point for the global economy” as momentum turned from disinflation to growth, with 2017 offering a goldilocks environment of dovish central bank policy, a weak US dollar supporting risk assets and strong, synchronised global growth.

This benign, normalised environment is something Goddin expects to continue into 2018.

“Overall we expect another strong showing from equities, although not with the same exuberance of 2017,” he said. “In this respect, 2018 will present a not-quite-Goldilocks scenario of continued growth with some higher, but still controlled, inflation.”

Equities are likely to outperform bonds but are unlikely to be as strong as they were in 2017, he said, adding that the US could be a top performing region due to a short-term boost from recent tax reforms.

However, it is in Asia and emerging markets Goddin suggested look the most attractive, with the potential for reforms to push up margins in Japan.

Goddin added: “We continue to see growth (technology) and value (cyclicals) as the styles to be exposed to. Defensives sectors like consumer staples should continue to underperform as historically high valuations, which were a product of the low growth and low yield years since the great financial crisis, begin to unwind.”

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