“Prediction is difficult, especially if it’s about the future” wryly sums up the notoriously difficult business of forecasting. However, despite the difficulty involved in navigating the vagaries of prediction, it remains central to economic policy and is often integral to investment decision-making.
At Morphic, we rigorously test the veracity of prevailing opinions. This process gives a set of forecasts, but from a different perspective; by ruling out things we think are unlikely to happen, we can then better understand the dynamics of our investment universe and execute more informed investment decisions.
Below we set out our five anti-predictions for the first half of 2018.
Synchronised global growth will not falter
The synchronised expansion has more room to run. Global growth’s strength and breadth show little in the way of abating, and while we expect the impacts of US monetary tightening to start showing, we do not expect it to derail the positive forces at play – US tax reform, strong global trade and business optimism.
Unloved European banks will not be an investor graveyard
If our call on continued strong European and global growth plays out in the first half, the concept of paying to own European bonds may lose its allure. Combining this with growing credit demand and the passing of peak regulation, we could see an explosive rally in even the most unloved of European banking stocks.
Resurgent Pakistan won’t lose more ground to India
Sadly, no test matches are planned between the two nations until December 2019. However, after a brutal 2017 for the Pakistani stock market, and an excellent one for India, prospects for a change of leadership look strong in these terms at least.
Even by its own standards, Pakistan is now cheap on almost any metric – and despite a year of political turmoil and Trumpian attacks, both corporate earnings and economic growth prospects remain solid. By contrast, valuations in India are now exceptionally elevated. This has recently been reflected in foreign investors trimming their holdings, whereas in Pakistan there are early signs of a return.
Weak consumers will not buckle the global economy
Current concerns over countries with overly leveraged consumers (Australia, Canada and Norway, for example) are overdone. The ongoing positive global and local business backdrop combined with positive fiscal developments will encourage consumers to refrain from slowing spending any further.
The bull market in employment diversity will not end
In the US, the post Global Financial Crisis world has been characterised in part by a falling participation rate in the work force, which has helped pull the top line unemployment level down. However, this has mostly been a story about the male population, with female participation being much more resilient. We expect this trend to continue and women to continue to grow their share of the work force and drive economic growth. While last year saw a drop in the number of S&P 500 CEOs that are female, we see this as a blip along the road to increased diversity.
Jack Lowenstein (above left) and Chad Slater are portfolio managers of the Trium Morphic ESG L/S Fund