- China’s command economy will support its transition period
- US economic cycle remains uncertain, but it isn’t over yet
- Equity markets remain reasonably valued, with opportunity in UK mid-caps
Peter Elston, CIO, Seneca Investment Managers, says:
“We believe on balance that the world will continue to grow in 2016. Equity market valuations by and large are low enough to make positive returns this year and western government bonds remain overvalued.
“The world’s two largest economies, the US and China, contributed 82 per cent of global nominal growth over 2014 – 2015. Both nations are at critical junctures. While the US is arguably much closer to the end of its business cycle than the beginning, as evidenced by unemployment that has been falling for six years and that has just recently hit 5%, China is undergoing a pronounced and persistent structural slowdown, as evidenced by plummeting industrial metals, iron ore and bulk shipping prices.
“Yet there remain signs of progress in China’s services sector with PMIs remaining well above 50, while the collapse of Macau casino revenues is an indication that President Xi’s anti-corruption drive is biting, and reforms of China’s welfare system are ongoing. Overall, our view is that China is in a transition phase and will benefit from shift it is making from an economy reliant on manufacturing to more services- and consumption-driven growth.
“With the process of modest rate rises now underway and likely to continue – albeit haltingly and only to what will remain historically low levels – the future shape of the economic cycle in the US has become more difficult to determine. There is no doubt that some parts of the US economy are struggling. The strong dollar has put pressure on manufacturers while the sharp decline in the oil price has led to a contraction in the oil and gas sector.
“However, we believe America’s economy is big enough, deep enough and strong enough to absorb the pain. The services sector accounts for 80% of the US economy. Contractions in manufacturing and energy sectors should be considered part of the process of creative destruction, with freed up labour being employed in other, higher value-added areas of the economy.
“This optimism is supported by the US yield curve data, which does not suggest that a recession is on the horizon. Additionally, the US economy has room to improve without putting upward pressure on wages, as supply of labour is boosted by people re-joining the workforce. This means that inflationary pressures should remain benign for some time, allowing the Fed to maintain an accommodative monetary policy – interest rates may rise but they will remain low. We therefore don’t believe the cycle is at an end yet.
“In terms of valuations, we see no value in developed sovereign bonds: at some stage we believe yields will rise significantly and government bonds will bite the hand that bought them. High yield bond spreads have moved out, which given our expectation of future growth means this is an attractive area for us, though we continue to avoid the oil and gas industry, which is suffering from the Saudi squeeze on margins.
“With regard to equities, these appear reasonably valued especially on price to book and yield metrics and the apparent lack of any imminent end to the global cycle from yield curves and labour markets. In addition to Europe, the value in UK mid-caps can be highlighted, where we expect continued good performance, and which are free from the excessive dividend concentration and low dividend covers so apparent in the large cap universe.”.
Past performance is not a guide to future returns. The information in this document is as at 30.11.2015 unless otherwise stated.
The views expressed are those of Peter Elston at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca and do not constitute investment advice. Whilst Seneca has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.
Seneca Investment Managers Limited (0151 906 2450) is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP16/01.