A key component of our investment process remains understanding some of the prevailing themes in the markets and what they might mean for relative asset class performances for the following three to five years. One of the themes that we have seen evolve over the last eighteen months is the transition from a synchronized global growth pattern to a more mature stage of the growth cycle, during which we tend to see a divergence in growth trends. Whether we look at the differences between growth and value-oriented stocks, or US and non-US stocks, or even stocks and bonds, the divergence in monetary and fiscal policies across the world is resulting in differing dynamics across asset classes and across regions.
To that end, we thought we would comment on two topics that highlight the opportunities and risks both abroad and in the US. The first is a closer look into the state of Brexit and where we are two years removed from the surprise referendum in the UK and the brief bout of volatility that ensued. The second topic is more relevant to our domestic economy and highlights the impact and outlook for real estate, an often-cited supporter of the growth outlook for the US economy. These two research pieces put together by our colleagues at Asset Consulting Group, dissect the various factors in both scenarios.
We find them interesting for two reasons. One is that they highlight two separate forms of risk. Brexit is a clear reminder of the risks created by geopolitical forces, while the slow-down in the US housing markets is a more typical example of late cycle risks. The second interesting insight is how these two topics highlight the idiosyncratic factors that impact individual economies and offer a reminder as to why we always view the investment landscape from a relative perspective. In isolation, one could argue that neither represents a great investment opportunity, as both face headwinds to growth. However, when we dig deeper, we see the pros and cons for both. Valuations and dividend yields outside the US remain favorable, though they carry heightened currency and policy risks. In the US, corporate earnings growth has proven robust, however, a strengthening US dollar and wage pressure could negatively impact profit margins going forward. Interestingly, in both scenarios, the market consensus appears to reflect a “bend but don’t break” impact on economic growth. With that in mind, our position is to take opportunities to rebalance without espousing any material risk reduction steps as they do not appear warranted at this juncture.