Equity outlook: Parallel worlds

In financial markets, there are often two competing narratives to consider. What we face at the moment is of a different order – two seemingly parallel worlds.

First, the positive world. The global economy is growing fast, driven by extraordinary innovation and technological progress. An industrial revolution is taking place and its impact is everywhere, as are the related investment opportunities. This structural background is validated by economic data which reflect an accelerating transformation with US manufacturing running hot, emerging markets contributing an ever-increasing proportion of global growth and wealth, and even struggling economies like Germany showing signs of recovery. From a bottom-up perspective, record-high profit margins are fueling broad-based earnings momentum, and well-run companies with good visibility can be found in every corner of global markets. In short, a golden age for equities sustained by real economic activity. The recent monetary tightening in the US, Europe and Japan reflects a desire to temper any inflationary consequences.

However, at precisely the same time we are in a world sometimes described as an ‘omnicrisis’ or a ‘perfect storm’ with bond markets selling off as governments grapple with large and growing debt loads, political strife, US-China trade dislocation, and an energy crisis caused by two major wars. As credit conditions tighten, asset markets look vulnerable as refinancing gigantic global debt loads becomes more and more difficult. Moreover, the AI boom is driving inflation in energy and hard assets while encouraging rampant borrowing, crowding out government debt-raising, which is pushing up yields even further. A fragile edifice.

We tend toward the positive viewpoint. Earnings growth, still healthy liquidity and several forms of stimulus going into the US mid-term elections are the overriding factors for a constructive outlook, while being cognizant that the risks are very real, and building.

We are endeavoring to present a balanced and constructive perspective in this equity quarterly. As well as the DM outlook from Tom Globe and the EM outlook from Wim-Hein Pals, we visit London, Argentina and many points in between. Also included is an interview with Natalie Falkman, our Zurich-based portfolio manager of Robeco’s Circular Economy strategy, one of our thematic equity strategies.