As we approach the midway point of 2014, there seems to be little indication that markets are losing positive momentum, a departure from patterns seen in years past when bull markets have paused or corrected sharply during the summer months.
Early June saw global markets reach new highs, with the S&P 500 index closing at a record 1951.27 on June 9 and the FTSE All-World Equity index hitting a peak of 249.73 on June 10, as investors reacted to encouraging US employment growth data, rising Chinese exports, and better than expected Japanese GDP.
Such isolated and relatively short-term economic news-flow should not be given undue significance. However, the positive data did help markets maintain the remarkable run that has continued since the depths of the financial crisis in 2009, trebling the major indices in value, with the S&P 500 index up 132.06 per cent and the MSCI Europe index up 85.14 per cent for the five years to the end of May 2014.
It is worth reflecting on the primary drivers of this strong stock-price performance. The 2008-2009 financial crisis was marked by severe balance-sheet stress for many companies and governments, as well as deep erosion of business and consumer confidence globally.
A logical expectation at the time would have been that a rebound in economic growth would emerge gradually, but would potentially require several years of capital replenishment, driven by corporate cost vigilance, consumer caution and tight capital budgets.
We believe this has essentially played out in the ‘real’ economy, but at the same time financial markets have followed a very different path due to the profound influence of monetary policy actions in the past five years.
The world’s central banks have pursued interest rate policies that have skewed the market’s normal discounting mechanism and instead forced asset class trade-offs among investors. The net result is that financial asset appreciation has far outpaced the creeping pace of real growth.
Numerous commentators believe some form of equity market correction is now overdue, and we may yet see one, particularly as the end of quantitative easing policies in the US is expected later this year, while interest rate rises in the UK could come later in 2014 and are forecast for 2015 in the US.
Both could have the potential to upset markets. One view is that further upside in financial assets is more likely to be linked to economic and earnings trends as opposed to the liquidity-fuelled levitation of sentiment and multiples that has driven gains in the past five years.
A straightforward and fundamentals-based investment approach is well suited to current conditions. Buying a high-quality business at an attractive discount to its intrinsic value and owning that company over many years is one of the best ways to protect and grow capital.
Regina Lombardi is managing director and head of the BBH consumer and media equity analyst team