US ‘returning to old normal’

FED HIKES: RETURNING AFTER YEARS OF ‘ECONOMIC STIMULUS’

Andrew Vintcent, fund manager at ClucasGray Asset Management, spoke with Moneyweb editor Ryk van Niekerk about market expectations in a weekly webinar. This is a short excerpt.

RYK VAN NIEKERK: Welcome to this webinar, exclusive to our Moneyweb Insider Gold subscribers. This webinar is where we analyse what South Africa’s top fund managers think about the market. My guest today is Andrew Vintcent, fund manager at ClucasGray Asset Management. Previously he has been in the asset management industry at Stanlib, as well as Rand Merchant Bank. VAN NIEKERK: Andrew, on Wednesday we saw an increase in the interest rate in the US, it was expected and it seems like we are now really moving into a rising interest rate cycle. What are your views on this? ANDREW VINTCENT: We are very encouraged by what’s playing out in global economies right now. That rates are rising in the US is part of a normal economic cycle. We have had a sustained period of central banks fighting deflation with very accommodative monetary policies and we think the fact that we are entering into a global period of reflation and mildly improving economic growth is very encouraging. It’s encouraging for corporate earnings. I think it’s important to stress that nominal GDP growth in the US has been on a structural declining trend now for a number of decades, where you’ve had inflation running at increasingly lower and lower levels and the nominal GDP growth, as a result, has also been running at low levels. So, the environment for corporates to generate strong earnings growth in an environment of low nominal GDP growth has been very difficult. VAN NIEKERK: But we have this interesting situation in the US, we’ve seen this economic turnaround starting under President Obama and then Trump took over and he made very short-term, almost populist announcements and promised populist policies that in theory at least should boost the American economy. Currently the markets are at an all-time high in the US, they are very, very strong, do you expect this momentum to continue and where does it come from? VINTCENT: I think low interest rates have ultimately done a lot of their job, so bond yields have been running at historically low levels, we’ve never seen bond yields globally at levels this low and shortterm interest rates have also been very low. But the new policies from the Trump administration seem to be promoting fiscal stimulus, which is very encouraging. So the jury is still out really as to whether they can afford all these fiscal stimulus measures but be that as it may, right now the market is rising in anticipation of a better economic environment.

So whether it’s driven by the arrival of the new president and the new administration or whether it’s driven by the simple fact that we’re in an economic cycle where we’ve had a sustained period of stagnant, nominal GDP growth and we’re into a natural cycle where things could potentially improve. Equity markets

We’re encouraged by what’s playing out in global economies

obviously like growth, our concern is the S&P is up 21% in dollars year-on-year.

So we are encouraged by that but we must caution that the PE multiples that one is now paying for the anticipated growth to come through are reaching levels that are quite elevated. I think one of the big themes that has driven the structural re-rating we’ve seen over the last ten or 15 years has been the falling of bond yields, the European bond yields have gone negative, US bonds troughed at about 1.4%, 1.5%.

That falling bond environment has enabled equity investors to pay higher multiples for the market.