24th November 2015
Margaret Lawson, manager of SVM UK Growth looks at which economic indicators investors should trust, and which are unreliable…
A lack of clarity on global growth and the US Fed’s next move have brought a note of caution into the market. Although investors are not currently worrying about the Eurozone periphery, currency wars, or growth in China, there are always new fears in the headlines. Amidst this noise, are there indicators that give a more consistent guide for investment strategy?
The headlines have distracted attention from one of the biggest issues, US dollar strength. This is linked to the issues of whether inflation will return, and if emerging economies will face credit problems. With low commodity prices, growth in the supply of dollars globally has slowed. This impacts emerging market borrowing, which has been helped by an easy supply of cheap dollars. Many emerging economies are now seeing weak bank lending, but have limited policy options if they are also to defend their currencies. A US interest rate rise may exacerbate disinflation.
Despite the apparent robustness of the US economy, the jury is still out on global inflation versus disinflation. Some soft commodities – cotton, orange juice and sugar, for example – have bounced recently. But many others remain extremely weak. The price of iron ore and steel remains depressed. Investors should be vigilant for any broadening of commodity price recovery. Similarly, US wage growth would be an indicator if it broadens from simply reflecting current skill shortages. However, the disinflationary pattern may persist. It is triggered by weak productivity growth, resulting from a lack of opportunity for productive investment for all the money that is being printed. Against this background, our strategy is to focus on shares of businesses with genuine underlying growth and some potential for self-help.
Mixed signals in the UK mean that an interest rate rise may be deferred. Inflation is likely to remain low and UK growth will continue.