In 2009, the International Monetary Fund, or IMF, tightened its definition of a global recession to indicate a drop in per-capita GDP worldwide (measured on a purchasing-power-parity basis) coinciding with weak readings on key variables such as employment, trade and industrial production. According to this definition, there have been four global recessions since World War II – 1975, 1982, 1991 and 2009. Thanks to this new definition, the slumps of 1998 and 2001 were excluded.
Economist Robert Shiller noted in the New York Times: No single narrative narrative seems to have enough compelling force at the moment to engender a downturn as big as the last one, but there are significant worries about outsourcing, downsizing and globalization, along with deep concerns about rising inequality, refugee and immigrant flows, and what has been called secular stagnation of the economy. We don’t know whether any specific event — say, an unexpected spike in oil prices or a decline in the stock market — will help transform any of the current social stories into a truly virulent economic disruption. But history does tell us that human imagination can spontaneously transform discrete events into world-shaking narratives of unexpected color and force.
Emma Wall, editor at morningstar.co.uk., spoke to Marcus Brookes, head of multi-manager for Schroders on whether the good times are over.
Various asset managers have said that t
he significant rallies that we've seen across numerous asset classes over the last five years are no more and we should be moving into gold and cash and sort of hunkering down. What's your position on that?
I agree with a large part of that. If you look at the S&P 500, the U.S. stock market started rallying in March 2009. All the way through today it has done really, really well, so over 300%. And it's the second longest bull market in history. Now, you could say, well, so what? Why can't it be the longest? Why can't it do even more from here?
But we're now at a stage where the economic tailwinds that that economy has had is starting to fade slightly. That doesn't mean that we go into recession straightaway, but it does mean that all the really, really good stuff that helped corporates make excessive profits, they are starting to wane. As a result, you've got what appears to be relatively expensive market at peak profitability where everyone is fully invested. It's really hard to see how it makes progress from here.
It's quite difficult to call though market timing, isn't it? A
number of very successful long-term managers made the call too early around 2010-2011 and actually missed out on a rally.
From 2009 through to 2011 was probably a full market cycle in its own right because the rebound at that stage was led by value sectors that we would describe today - mining, energy companies and to a degree the victims of the Great Financial Crisis, the financials, the banks in particular.
Then from 2011 onwards, it's been a totally different profile. So, all the emerging market type names, the energy companies and the mining, they've had a dreadful, dreadful time since 2011.
There's two different market moves; the first one, the recovery; the second one, the maturation of the market cycle, which this time is not being led by really cyclical value things. It's being led by super safe stuff and this is really bizarre.
It's not like we're saying, oh, well, you know, the economy is doing fantastically well; consumers are making more money, they are spending more money; they're going and buying new cars. Those are not the sort of companies are benefiting from those sort of trends.
The sort of companies that are doing well are pharmaceuticals, utilities, tobacco, defensive stocks.
I think when you can characterize the last seven years, two stages, the second stage is really being a bull market in safety because I don't think we have really got over the Great Financial Crisis. I don't think the enormous levels of debt that led to it ever really got taken away and therefore, the sort of slight recovery is where we all hoped that this was a return to trend economic growth that then disappointed and then we all thought, oh, my gosh, it's going to be another Great Financial Crisis. And through that phase I think investors thought, well, if I've got to be invested in anything, I want to be invested in safe stuff and if you get enough people doing the same thing, those are the assets that do really well.
T
hose assets have now become extremely expensive. So, how do you manage both that cautious stance with diversification?
So, if you were to suggest that we're towards the end, we're late cycle, we're towards the end of an economic cycle that we may be somewhere near therefore the end of a market cycle. The sort of portfolio you would traditionally have would be to start going by those dull, sensible utilities; tobacco, pharmaceuticals.
But that is now a very expensive part of the market. So, we got a quandary as all investors that the safe stuff is actually pretty expensive. Now the risky stuff historically, mining, energy, financial, is the stuff that you would absolutely avoid, at this point, looks outstandingly cheap. To the degree you could base a case – now I wouldn't necessarily want to be too firm about this – but you could base a case that because they are under-owned because they are so cheap even if the bad stuff does happen, they could be okay this time. They may not necessarily make you money, but they could outperform the safe stuff.
Now, that could be a very weird outcome for a lot of investors. I don't think they are positioned for that at all.
