Having spent the last 3 weeks on the road around Australia, the most striking takeaway is how bearish the local investor audience is relative to the optimism that is building offshore. In London, market sentiment views the 24% rally we’ve seen in global share markets over the past year as reflective of an unfolding synchronised upswing in the global economy, one which will propel company earnings higher.
In Australia, the narrative seems to run that the move higher in global share markets has been irrational, that valuations are now stretched, and that there is a greater than normal risk that a market correction is lurking around the corner.
Looking at the data, it is hard to conclude that the move higher has not been driven by greatly improving fundamentals, a news story that does not seem to get enough coverage in Australia.
In the video and edited transcript below Emma Davidson and Miles Staude explain the fundamental drivers behind the rally, and highlight three key reasons to remain optimistic when looking ahead.
On the whole there’s this wonderful good news story about a synchronised global upturn that we are not really seeing a lot of in Australia. It’s not making the front page of the papers here.
The mood on the ground in Australia
Probably the thing that struck me the most is the pessimism, amazingly. The feeling here in Australia is much more bearish than what you get in London or New York right now.
There seems to be this really unfortunate narrative that runs along the lines; ‘Markets have had a great run-up, the mood has been irrational and valuations are getting stretched.’
The implication being that there’s a much greater than normal risk. That there’s some nasty correction waiting for us around the corner.
Why the negative sentiment?
We have had a wonderful move up in global share markets for the last year. Global markets are up over 20% in 12 months, but it’s been a move that has been entirely justified. There’s some really good news stories happening out there. Probably the main one, the biggest driver for the market move we’ve seen is the pickup in global growth.
Global growth is currently running at its fastest pace in five years and accelerating from here. On the whole there’s this wonderful good news story about a synchronised global upturn that we are not really seeing a lot of in Australia.
It’s not making the front page of the papers here.
Three key pillars
I think one of the really bullish signs about the uptick we’ve seen is it being so broad-based. However, I guess there’s probably three key pillars, the main one being Europe. If there was an area that we’re sort of as surprised, it has been Europe where, after a number of years and two trillion Euros of quantitative easing, we’re finally starting to see a proper recovery. So things in Europe are looking much better than they did a year ago.
I think one of the really bullish signs about the uptick we’ve seen is it being so broad-based.
That’s happened as the same time as the U.S. economy continues to gather steam, gather pace.
And then the last bit is really a case of growth not falling. A year ago everyone was expecting the Chinese economy to slow quite significantly. It has held up much better than the market and the Chinese government itself was expecting.
So you put those three factors together and on the whole, the global economy is now in its best shape since before the crisis.
So how long is this rally going to last?
I’m probably not confident enough to call markets going up another 20% this coming year, but broadly I think there are three factors that are very supportive of equities at the moment.
One is that we’re seeing clear signs of acceleration in investment growth. That’s companies investing in themselves for the future, which I think votes really well for this upturn in the cycle.
Secondly, globally labour still struggles to get any significant pricing power and that does a few things. Probably most importantly it keeps bond yield low through low inflation and it keeps the share of corporate profitabilities going to companies high. In a low inflationary environment, companies are basically the biggest beneficiary of a pickup in growth.
And lastly, for all the rhetoric, central banks continue to tread very gently. The narrative very much seems to be they would rather act too slowly than move too quickly in terms of moving liquidity and removing stimulus.
When I put all those factors together I certainly wouldn’t want to be underweight global share markets from here.
Miles Staude of Staude Capital Limited in London is the Portfolio Manager at the Global Value Fund (ASX:GVF). This article is the opinion of the writer and does not consider the circumstances of any individual. Mirabella Financial Services LLP is the investment manager of the Global Value Fund and has seconded the investment team at Staude Capital to manage the Global Value Fund.