Money: Dave Deruytter leads you through the maze of the world’s financial markets.
Slow economic growth and high earnings are keeping the financial markets in check. Interest rates are forecasted to stay low in the near future and will offer support to stock prices. Equity markets are always correctly priced at any given time, balancing offer and demand. Nobody has a crystal ball to predict the future. Still, we all want to make sense of the current levels of the financial markets and have a view on their future performance.
The pace of economic growth in most of the countries around the world is slowing down. China aims for just over 6% in economic growth, the lowest in decades. The US economy is decelerating, leading to about 2% economic growth this year. The European economies lead the slower growth group. Some EU countries have a hard time to even grow their economy at 1%. Next to economic growth, earnings, particularly future earnings, are another favourite indicator of investors. The current earnings of quite a few stocks are already on the high side. One can doubt the capacity of companies to deliver even more earnings per share.
Eventually comes the question of the potential of the alternatives to shares for investment, bonds and real estate on top. If the economic growth of the large countries decelerates, and official interest rates stay low, bonds may have a period of strong performance, but only because of potential capital gains, not because of the coupons they pay.
Real estate? Yes, of course, it always is an interesting alternative, but aren’t prices already
really high in many markets? Is the US housing market getting into dangerous territory again, because of over-borrowing by people? To diversify your real estate assets, mutual funds or companies that invest themselves in real estate, are an option to consider. Because of very low interest rates, cash is not a real investment alternative today, unless as a safe haven, but that is costly. In most of the EU you do not get enough interest on savings accounts to cover for inflation. Thus, part of your capital invested in cash is eaten away by inflation. Gold is another asset investors turn to when they are not sure about the outlook of the financial markets. Gold essentially is a raw material, an asset with only potential for capital gain, yet no dividend or interest income.
If you need regular income from your investments, the only options are stocks with a high dividend yield, bonds with a high coupon, or real estate with a high rent. All of which are not so easy to come by these days. Plus, if you find them, there must be a reason why they have to offer a higher dividend, interest or rent income than the average of the market. There is no extra income return without any risk.
Politics are influencing the financial markets too. The Brexit saga is lingering on, keeping the bulls at bay. On the international trade front there could be a deal in the making between the US and China, but that news has been around for a few months now, and apparently without a conclusion nearby. No surprise that quite a few investors are sidelined, though we saw a small bull run on the stock markets so far this year, mainly because of a lack of alternatives.
If people would put a larger part of their income into consumption rather than in investments, that should be a good thing for the worldwide economic growth. In this fast changing and challenging time with a lot of workers in burnout, shouldn’t we be outsourcing more of our daily household tasks in order to balance our lives? Of course, first we should be able to afford that. For that to be the case, it is important that the wages of the middle class are high enough. If one looks at the starting wages of the young people joining the workforce today, substantially high wages are not guaranteed.
If on top of extra consumption some new big innovations could come through and create new pockets for business or new economic growth, we might be heading upwards structurally again on the financial markets. ‘AI’ and ‘Big Data’ look promising, but the more we learn about them the further away real breakthroughs seem to be. Most realizations in both fields look more like evolutions than revolutions. Will it be 5G and the Internet of Things that will do the trick then? Maybe, but rumours have been around in those markets for quite some time now too. If there is no delivering soon, investors may see it as a false promise or again as a gradual evolution rather than a Big Bang.
The question on the mind of many investors remains whether or not we will first have a recession, or even a small or big crash on the financial markets, before heading upwards structurally again. They remember the worldwide financial and economic turmoil that started at the end of 2007 with the collapse of Lehman Brothers, plus the rebuilding of the system and trust thereafter. The financial markets could go either way when looking at the cards today.