And, while it remains confident that its process will one day work again, “because the laws of economics will never be repealed – for now they are suspended and may be for some time; an indefinite period involving indeterminate levels of risk”.
The reason this is concerning is that, this is a fund, the track record of which stands up to scrutiny and, if they are unable to make head or tail of things, what hope is there for the rest of us?
Compounding this sense of gloom is a rather downbeat assessment of the prospects for the two main pillars of the global economy – the US and China.
“US equities face a maturing business cycle, a growing risk that the Fed may have to rapidly tighten monetary policy, stretched corporate balance sheets and high valuations. At the same time, in China, the slowing economy and the ever increasing opacity of policy making cloud the growth outlook for the whole of Asia, the emerging markets asset class and the world in general,” the firm said.
Adding: “Unfortunately while there is, even among this gloom, still scope for significant upside, the path of the sources of this upside – Chinese policy making and the raw power of excess global liquidity are almost impossible to predict with any confidence. To try and pre-empt them, given the current high level of equity market valuations, is fraught with downside risk.”
Of course, there are those that have a more sanguine view of where things are headed. Strategists like Rathbones’ Ed Smith, for example enumerated a number of reasons on Friday investors should clutch hold of to keep the faith.
Largely focused on China, he said the poor start for equities this year has been driven by fear rather than economic fundamentals.
“This has been a financial correction, not an economic one: the probability of a recession in developed markets in the next four months currently implied by the macroeconomic data is very low.
And, while markets have become obsessed with Chinese data and stock market performance this focus is misguided because the Chinese equity market is “notoriously fickle”. And, he added, economic data continue to surprise to the upside in Europe and Japan.
“Across the Western hemisphere non-manufacturing PMIs are firmly in positive territory. Six of eight developed market services PMIs are above 55, up from three last quarter. This is far from an Armageddon scenario. Disappointing US manufacturing ISM data should be taken in context: the sector accounts for just 15% of GDP; services is the main driver of Western economies and in the US that ISM is at a healthy 55.3.”
Such a perspective is comforting, especially given the doomsday scenarios articulated earlier in the week, but I can’t help but shake the feeling that the stakes this year are pretty high.
