Recent economic data points to a consistent drop in inflation across global markets and to a soft landing for economies, which in turn should cause different parts of global equity markets to perform well, according to Guy Miller, chief market strategist and economist at Zurich.
Speaking to FT Adviser Vantage Point, Miller says: “Inflation numbers coming down is crucial for investors, and core and headline inflation are both now falling consistently after two or three months when the numbers were starting to disturb investors. In the US the economic data around employment and other measures is softening, but not in an alarming way.
"So the data is supportive of the idea that we get rate cuts, that is why equity markets are holding up. But I think, when there was uncertainty around the direction of interest rates, the priority for investors was to buy companies that didn’t have a lot of debt, so there was no refinancing risk, and the big US technology companies have those characteristics. But rate cuts, while they won’t lift all boats, will lift more boats."
Stephen Jones, chief investment officer at Aegon Asset Management, agrees the outlook for monetary policy is now more certain, with rate cuts inevitable, and says this will have to lead to a greater proportion of the equity market delivering returns.
He says: “Some of the stocks that have been beneficiaries of the market conditions of recent years trade at valuations that are very high, the companies in question have been delivering earrings growth as well as share price growth, but at the multiples at which they currently trade, it is hard to see how much more upside they could have. The most obvious beneficiary of the rate cuts are small caps.”
Miller is cautious on the outlook for the global economy, but feels that rate cuts will matter more than the prevailing fiscal environment, particularly if the US economy does produce a soft landing – a term usually denoting a moderate slowdown in economic growth as a consequence of interest rates being higher, but not a recession.
The one area where he believes investors may be cautious as a consequence of politics is the Eurozone, where the imminent French legislate election may deliver outcomes that create uncertainty.
His view is that: “If the rest of the global investible universe is doing OK, then the obvious question an investor may ask is why bother with Europe?”
Other side of the coin
The managers of the giant Scottish Mortgage investment trust acknowledge that they “made a mistake in underestimating” the potential for higher interest rates to impact the performance of the companies they own.
Scottish Mortgage is a fund renowned for investing in companies in areas such as technology and biotechnology, which are long duration in nature – that is, the bulk of the returns those businesses will achieve are in future years.
When interest rates are high. Investors find those types of companies relatively less attractive to own as they can obtain higher returns immediately from cash and government bonds.
