Why current market optimism might be misplaced

The confidence felt by some industry experts is not shared by one chief economist

Why current market optimism might be misplaced

Although some experts are confident about what the Canadian markets can do in the second half of the year, the consensus gets a lot more muddied when looking at investment opportunities on a global scale.

It’s been a solid year so far for corporate earnings in the U.S. - a trend expected to continue into next year and beyond - and many investors have achieved good results with emerging markets investments. But, should these results spark fresh optimism or do they simply mask deeper, longer term themes?

According to Megan Greene, chief economist with Manulife Asset Management, low growth, low inflation and low rates are going to be the reality for quite some time. “The U.S. remains a 2% growth economy, the Eurozone in aggregate roughly 1.5%, and Japan around 1%,” Greene said recently. “We will no doubt have quarters of growth that exceed or fall short of these estimates depending on government and central bank policy. But, overall, we see little reason to believe that much has changed on the potential GDP growth front in any major developed economies.”

Although much of the confidence and survey data (known as ‘soft’ data) collected in the first half of the year was positive, Greene thinks that the hard economic results are not as robust or encouraging. She also believes that growth potential will be inhibited by an oversupply of debt, macro liquidity, cheap labour and regulation alongside a low labour force participation rate and unfavourable demographics.

A recent study conducted by Manulife Asset Management found that many of the company’s portfolio managers share similar concerns. Most PMs believes current levels of asset valuation in the U.S., in both fixed income and equities, are a worry and that although volatility may currently be low, it could create a false sense of calm on the surface.

As concerns around President Trump’s ability to push through any of his pro-growth policies grows, the majority of portfolio managers said they will be monitoring the speed at which the U.S. administration is able to navigate the legislative structure in Washington.

Bob Boyda, Head of Capital Markets and Strategy at Manulife Asset Management, believes that “investor optimism has certainly carried us post-election and into the first half of 2017 and it has propelled equity markets across the globe, for very good reasons: it’s been backed up by stronger earnings.”

However, Boyda believes that too much investor complacency is setting in, which could lead to a rougher road in the second half of 2017. “In many ways, our thesis for equities to return 4 to 5% - we call it the ‘half-return world’ - appears to be true for the majority of equities,” Boyda says. “However, a few mega-tech stocks have been leading the parade and, given the cap-weighted nature of the major stock indices, may be giving the impression that markets are doing much better than they are. History tells us that’s another reason to expect bumps ahead.”


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