Global slowdown doesn’t mean investors will take a hit.

Slowdown may benefit investors, experts suggest

Global economies are set to undergo a slowdown in 2019, according to the Organization for Economic Cooperation and Development, but that doesn’t necessarily mean investors will feel the pain in their portfolios.

The OECD released a report last month suggesting that global growth “passed its peak” and would decrease to 3.5 per cent in 2019 and 2020 from 3.7 per cent in 2018. Canada is expected to see growth slow by 0.3 per cent over the next two years, while the U.S. is projected to lose 0.8 per cent from its GDP growth rate.

European economies such as Germany and France won’t fare much better. Neither will emerging markets in China and Turkey.

While the projected slowdown has come as global equity markets have plunged in October and November, the two are not directly correlated, said UBS Global Wealth Management investment strategist Justin Waring, even if skittish investors fear that that’s the case.

“One of the problems is that our brains have evolved to where they’re excellent pattern recognition machines,” Waring said.

“They’re so good that they can find a pattern in complete randomness and this leads us into all kinds of traps — one of which is trying to use fundamental data to explain market behaviour when 80-plus per cent of market movement is driven by sentiment.”

For Waring, a 0.2 per cent drop in growth can barely be defined as a slowdown. It doesn’t signal a change in regimes “back to the dreary old days,” he said and it certainly does not point to a recession.

The projections are instead a sign that global economies have been performing incredibly well and are now set to turn with the cycle, CIBC chief economist Avery Shenfeld said.

In the cases of the U.S., Canada and Germany, the slowdown is a result of each economy reaching close to full employment.

Now, they’re losing any “elbow room” for growth.

“Part of this is a good news story that so many of us are working that there isn’t room to accelerate growth from these levels,” Shenfeld said, stressing that this is not the case for countries like Turkey, Venezuela and Argentina which are also set to decline. Instead, their projections are based on excessive debt levels and crises from within.

Shenfeld is more pessimistic about the Canadian economy than the OECD, saying that he expects growth to decline to 1.3 per cent in 2020.

A slight slowdown may actually be a good sign for equities markets, Waring said, reinforcing that the economies are going to become victims of their own development.

If there’s little room to grow at home, that means higher margin businesses must move into emerging markets, which would result in more sustainable profit.

In the U.S., a slowing of growth could result in a potential cooling period for interest rate hikes — a good thing for investors and for the bull market, he said, at a time when they haven’t had much to celebrate.

The MSCI World Index, which is often used as a gauge for the performance of global equities, has fallen more than four per cent year-to-date.

The Toronto Stock Exchange Index has seen losses of nearly seven per cent since the beginning of January. China’s main index, the Shanghai Composite Index, has plummeted more than 22 per cent in the same time frame.

Most of the pain occurred over the last two months as an escalation of a trade war between China and the U.S., historically low oil prices, higher interest rates in the U.S. and softness in emerging markets led to a mass sell-off.

And yet Waring remains overweight on global equities.

The markets are going too far in pricing in bad news on the trade war front, he said, given that a denouement could lead to a rally.

That’s led to undervaluation overseas and investors now have the opportunity to buy low, he said.

Waring suggested investing in value-oriented stocks over those focused on growth. Both the financial and energy sectors are attractive to him.

Valuations for the energy stocks are low, while bank stocks are “returning capital to shareholders faster than any other sector.”

Although the bull market may be in its late cycle, there’s little risk of a recession and therefore, there’s no need to buy into defensive options like utilities, REITS and cash, Waring said.

Not all market watchers, however, are as optimistic as Waring.

“I think the mentality of most people has been buy the dip and I mean that’s worked for nine quarters in a row, but you know, you might want to rethink that strategy ,” saidkj harrison& Investors portfolio manager Joel Clark.

If North American markets have undergone a 10 per cent correction, he said, there’s no reason why they can’t fall another 10 or 15 per cent. It would be a surprise to most, but Clark said he prefers to be prepared for that scenario and so he has taken on a conservative bias that focuses on income.

“I’ve been around enough to know that you can’t predict but you can prepare,” he said. “No one is smart enough to say unequivocally this can’t happen.”

SO MANY OF US ARE WORKING THAT THERE ISN’T ROOM TO ACCELERATE GROWTH.