Although global equity markets rose overall in November, the positivity was not universal. The S&P500 recorded its 13th consecutive month of positive returns – its best run since 2010 – while both it and the Dow Jones hit all-time highs for the latest of numerous times this year. Meanwhile, economic confidence in the Eurozone reached a 17-year high, even as inflation disappointed across the region. At the same time, Asian markets rose even as North Korea further escalated geopolitical tensions.
This emphasises an important point: the economic world is in a perpetual state of flux. Long-term investors are more accustomed to this maxim than most, as they seek to navigate portfolios through continually shifting economic tides. Yet while stretched valuations, a hawkish shift in monetary policy across developed markets and rising debt remain potential icebergs for markets, there are reasons to be optimistic about the broader economic picture.
Synchronised global growth
Firstly, we are witnessing something not seen since the financial crisis: the synchronisation of global growth. All major regions of the world are now growing. Particularly encouraging, is the sustained economic revival in Europe which has spread to the peripheries. Moreover, we are seeing the reawakening of growth across Asia, concurrent with rising commodity prices.
Debts remains at peak levels and will temper enthusiasm for some investors examining Asia. However, while debt remains an issue in China, the Asian powerhouse is also a great savings nation and this is helping to diminish the threat of rising real debt. Indeed, from a relative perspective Chinese net debt is extraordinary low and we continue to see a path for a sustainable level of China-powered Asian GDP growth.
Wage growth inflation
The second potential major driver for global growth is the reversal of stagnant or declining wages. Indeed, wage growth has been in the doldrums since the financial crisis, but could benefit from multiple tailwinds.
Rising pay has been suppressed as the working age continued to increase. However, as this stifling demographic dynamic passes its peak, it will relieve some of the downward pressure on wages. Moreover, unemployment levels have reached low levels virtually everywhere. Even in Europe, we are beginning to see significant decline in unemployment. This may now have the effect of a rise in real wages, as the plunging rate of joblessness finally increases workers’ bargaining power.
Improving consumer sentiment
The rise in populism – which one can argue is a response to a prolonged era of falling wage growth – is also a positive factor for wage inflation. In order, to stem the threat of populism spreading, policy makers will look to stimulate wage growth to appease disillusioned voters. This could deliver further positive wage growth surprises.
Wages are the largest proportion of GDP growth in developed markets. Any rise in wage growth will boost consumer confidence – and the injection of new demand will ripple out, creating multiplier effects in the economy. In recent years, negative real wage growth has halted consumer spending. However, for the first time in five years we are starting to see positive wage growth come through and this could unlock increased profitability across a number of sectors including leisure, technology hardware, mobile telecoms and beverages.
Equities offer relative value play
While stock market valuations continue to look frothy, equities have never looked better value relative to fixed interest securities. This investment case is strengthened by a backdrop of rising wages, increasing consumer sentiment and synchronised global growth. High valuations demand discretion, particularly in the US market, where prices are increasingly touching bubble territory. However, for value investors with a wide geographical mandate, there remain selective opportunities.
Robin Hepworth is CIO of EdenTree Investment Management.
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