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Changing fortunes

Asset market returns in the first quarter of this year were tightly bunched, presenting a significant challenge to clients’ portfolios.

The gap between the best and worst-performing asset class was only 8 per cent in Q1, the lowest in 10 years. Ironically, this synchronisation of asset market returns has occurred when there are unusually strong signs of divergence in underlying economic performance, especially between the US and the rest of the world.

Historically, the US has been the pied piper of the global economy and, with unambiguous signs of slowdown there, the easy inference would be to expect a similar slowing in economic growth to follow elsewhere. We are inclined to agree with the old adage that the four most dangerous words in investment are “This time it’s different” – although the US has been on a slower growth path for a year – but most other parts of the world are showing little inclination to follow suit.

Perhaps we should not be so surprised. In the 1990s, US and European business conditions moved hand in hand but since 2003, the correlation has collapsed. Increasingly, it looks like something has changed. The global economy is becoming less US-centric.

All this said, investors seem unwilling to accept that the global growth baton may have passed from the US to other countries without bringing the global economy to its knees.

At the moment, it is easier to find reasons to be fearful about the outlook for markets than to identify causes for optimism. Investors fret about the US housing market and the losses being suffered by financial institutions which lent recklessly to individuals with poor credit ratings.

Despite these fears, we maintain a relatively bullish stance on markets. We have been climbing this familiar wall of worry for years now, and while vigilance is required with regard to the situation in US housing, we suspect these problems will be worked through without systemic ill-effects.

Meanwhile, growth remains strong in the rest of the world, corporations continue to focus on efficiency and show a healthy respect for shareholders’ capital and equity valuations are only worrying if you buy the recession story, which we do not.

That said, we do worry that markets are too reliant in the short term on the next M&A “fix” and look forward to the day when the current growth “scare” has been revealed as just that.

Bill McQuaker is director of multi-manager for Henderson Global Investors.


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