During a year-end investing outlook webcast hosted by MFS Investment Management, James Swanson, chief investment strategist, and Erik Weisman, chief economist, highlighted stronger global growth and “merely moribund” inflation as important tail winds for U.S. retirement savers.
Of course, they also pointed to global macroeconomic concerns—fitting squarely in the camp that view the economic rise of China increasingly as a concern for the performance of developed Western economies.
The MFS data show that relative global growth trends have held steady since 2012: Developed economies have hovered between 0.5% and 2% gross domestic product (GDP) growth while emerging economies have ranged between 3.5% and 5% over that time. Interestingly, manufacturing performance indicators have been more even across global and developed economies—in fact, developed economies have turned in higher manufacturing performance index levels since roughly 2013.
According to the MFS experts, “Global inflation is still missing in action.” Inflation in the U.S. since 2015 has remained very close to the Federal Reserve’s 2% target, while inflation in the Eurozone has hovered around 1%. MFS pins inflation in China around 0% to 0.5% for this time period, while Japan has slipped in 2017 toward and even below 0% inflation.
Swanson and Weisman presented evidence to the effect that improved growth this year has come on the back of better industrial production and better trade. Moving to the all-important question of whether economic fundamentals align with current market pricing, they suggest there are some reasons for valuation concern. Right now the Standard & Poor’s (S&P) 500 is trading around 18 times the price-to-next-12-months’-earnings ratios, compared with an average of 14.4 times. European indexes similarly are trading some distance above the long-term average. Emerging markets and Japan, on the other hand, are trading right in the ballpark of their long-term averages.
The increasing “narrowness” of the sources of return in broad market indexes is also concerning to the MFS experts. Looking at the returns from the top 50 companies by market capitalization in the S&P 500, one sees that just the top 10% of companies by market cap represent a whopping 56% of total returns. In Europe, the issue is equally apparent: The top 5% of the MSCI EAFE index returned 32% of the total return so far this year.
According to Swanson and Weisman, high merger and acquisition activity tied to margin borrowing indicate the impressively long-lived bull market may be reaching the end of its cycle. However, other signs are cause for optimism about an even longer growth streak—for example, the percent total of U.S. households that are delinquent on credit card balances, which peaked at nearly 14% in 2009, has since dropped to 6%.
On the fixed-income side, MFS clients are increasingly asking questions about how to address the flattening yield curve, the experts noted. This will not be easy, but there are possible options for potentially boosting returns, such as laddering the portfolio.
The pair concluded that the markets in 2018 will be driven by four themes: even more concentrated markets; growth over profits; questions about the conventional efficient investment thesis; and evolving convictions about growth vs. value investments.