A normalising recovery?

31st August, 2021

There has been a notable slowing in economic activity over the past few weeks. European PMI data were behind expectations, while inflation and GDP data from other major markets has also disappointed. It appears that the restart may be over and we are now in ‘normal’ recovery mode. What does that mean for investors?

The French Markit Composite PMI came into at 55.9 versus expectations of 56.3, while the German figures were 62.7 versus 65. In normal times, these figures would set pulses racing among economists. However, added to slowing GDP data from the US and UK, it starts to build a more lacklustre picture, showing that early recovery momentum is ebbing. Markets that have been riding high on buoyant data, combined with monetary and fiscal stimulus – will this dent sentiment?

Certainly, there appears to be more concern over valuations, particularly in the US. Warren Buffett once identified the ratio of stock market capitalisation to nominal GDP as a key indicator of whether stock markets are over-valued. This is currently hovering at around 235% according to fund manager Ashmore. Buffett has previously identified 200% as a danger level. High profile fund managers such as T Rowe Price’s David Giroux have been backing away from the US market.

There is also a question on which parts of the market will do well. If growth slows and inflation stays under control, pressure will ease on central banks to change their current interest rate policy. This means interest rates (and bond yields) could stay low, which makes the high valuations of growth stocks look less stretched.

That said, after a strong run for value at the start of the year, the two styles are running neck and neck for the year to date. That means many of the old arguments for value still apply – it is at historically low valuations levels versus growth. Recovery is still in place, even if it is slower and therefore this could signal a better time for value.

This feels like an uncertain moment for financial markets. Inflation could slide or soar, meaning the direction of interest rates is difficult to read. Economic growth may accelerate once more if reopening goes to plan, but the virus remains capricious and unpredictable. It feels like a bad moment to toy with binary bets.

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This article was sourced from Adviser-Hub.co.uk.

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