The GDP growth that the world experienced in the decade prior to 2008 was due largely to an explosion in the supply of cheap money rather than an increase in produc-tivity, trade or education. This proved unsustainable and created asset price inflation disconnected from underlying socio-economic fundamentals.
The recovery in markets experienced so far has been due largely to the ability of governments and central banks to prise open the financial markets that slammed shut after the collapse of Lehman Brothers in 2008 and inject them with state-spon-sored cash. This intervention, while considered necessary in the short term, does little except to wind the clock back. It gives markets and economies breathing space but is no long-term panacea.
In a world which has experienced such an increase in money supply, inflation would usually be of primary concern to investors. At Ignis, we are alert to the prospect of inflationary pressures in the economy but we believe there is sufficient capacity, particularly in developed mark-ets, to comfortably absorb these pressures without becoming over-stretched.
Emerging markets such as China have certain well-rehearsed characteristics which have attracted large amounts of capital chasing growth.
We believe that over the long term, GDP in these countries will continue to grow strongly. There are very substantial risks to their equity markets that have so far been underest-imated. For example, like the rest of the world’s major economies, China embarked on a huge stimulus package in 2009. Around $500bn was pumped into the economy, much of which found its way into infrastructure spending. This infra-structure spend supported commodity markets, including commodity-related currencies such as the Australian dollar and Brazilian real. The fact that Chinese economy is controlled by a one-party state government means that latent problems may take longer to emerge than they might in more open, transparent markets. Our preference is for those markets that exhibit the potential to achieve a less superficial form of GDP growth.
Japan is poised to benefit from Asian growth, with 55 per cent of exports going to Asia, but importantly, it has a sophisticated education system and a democratic political infrastructure. It is a proven leader in high-tech markets and could provide many of the industrial innov-ations that global capitalism will need to survive in the face of the challenges it faces.
At a time when we are generally cautious over equities, we find Japanese valuations to be very supportive, limiting the downside in bearish markets. China, on the other hand, has further to fall if markets lose risk appetite again.
In the medium term, we expect markets to become more focused on fundamentals rather than short-term macroeconomic news flow. Markets will reward those companies that can make the best of a low GDP growth environment, with mean-ingful competitive advantages and pricing power. In this environment, talented fund managers taking active bets and picking stocks should be expected to outperform their indices after a normalisation of market conditions.
Simon Mungall is head of multimanager at Ignis Asset Management.