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Economic optimism drives stockmarket highs

2017-10-24 11:50:31

Investors are getting convinced that the world can enjoy strong growth and low

inflation

BARELY a day goes by at the moment without Wall Street hitting a new record

high. The market has kept marching upwards despite all the headlines about the

North Korean nuclear threat, a potential break-up of NAFTA, and natural

disasters like hurricanes.

If you want to know why the market keeps rising, just look at the latest poll

of global fund managers by Bank of America Merrill Lynch. Almost half of all

the managers now expect above-trend growth and below-trend inflation, what is

dubbed the Goldilocks economy (she wanted porridge that was not too hot, or too

cold, but just right). That is the highest proportion recorded in the history

of the survey. Indeed, for the last six years, a plurality of managers have

taken the view that both inflation and growth would be below trend.

A net 41% of those managers think global growth will strengthen over the next

12 months. Putting their money behind those beliefs, a net 45% are overweight

(have a higher holding than usual) in equities. A remarkable 85% of managers

think bond markets are overvalued, another record. While there was talk of a

"Trump bump" earlier this year, belief in fiscal stimulus is not the main

reason for the optimism; just over two-thirds of the managers polled think

there will be some tax reform in 2018 but that the shift will have little

impact on risk assets.

The big turning point was really February 2016, when fears of a Chinese

slowdown were at their worst. Since then sentiment towards emerging markets

seem to have recovered; Peter Elam H kansson of East Capital think we may be

just a couple of years into a 5-6 year bull run for the asset class. As our

recent briefing argued, asset prices are generally high, thanks largely to low

interest rates. At some point, rates will rise too much, or the economy will

slow, or one of the geopolitical risks will bow up (literally or

metaphorically). Until one of those three bears appear, investors will trust in

Goldilocks. To quote Jonathan Ruffer, a fund manager

"The pessimists sit like crows on a wet telegraph pole, waiting for the markets

to break but a crow can sit only for so long on the pole without indigestion."