Read the headlines, and you’d assume that we could be approaching the end of the road for growth – and one reader this week has told me that he’s shifted his portfolio entirely into cash. It is easy to understand his concerns. The system that has delivered the global economic growth of recent decades appears to be facing several existential threats, on the one hand Brexit, on the other the prospect of a major trade scrap between the world’s largest powers.
The reality, however, is that this has yet to manifest itself into any major market weakness, at least in developed markets – there have been wobbles, but the markets have generally found their feet in relatively short order. The FTSE 100 hasn’t had a good summer but still sits close to record highs; the S&P 500 has continued to power higher and higher, up 17.6 per cent over the past year.
One reading of the market could simply be that the constant barrage of political spin is at odds with what’s happening at a macroeconomic and corporate level, where readings and results have generally been positive. At the IC, we’ve spent much of our summer covering the annual deluge of half-year results, and there are few broad signs that trading is likely to suffer any imminent cataclysm. Second-quarter earnings in the US have also been better than analysts had expected.
Nevertheless, after such a run it is healthy to ponder how long the good times can last. Earnings growth in the US has been supported by corporate tax cuts and debt-funded share buybacks, while the tailwind of low interest rates has done much to support asset prices more broadly. This ammunition cannot last indefinitely, nor, you might think, can the good fortune of the gigantic technology companies that have underpinned the strength of the US market.
Yet, as investment trust Scottish Mortgage argued at the event, these technology companies are also at the forefront of fundamental changes to the way the world works. And countries such as China – also, as we heard, a huge market opportunity for smaller Japanese companies that, thanks partly to Abenomics, are embracing technology to improve productivity – offer an intersection of structural, long-term growth trends.
Of course, much can go wrong between now and the future – the troubles at Tesla, a favourite of Scottish Mortgage, amply illustrate this (the trust appears to be hedging its bets here with an investment in Chinese e-car maker Nio). But although true growth investing still requires a leap of faith, it is no longer a dot-com-like punt to believe that we are still in the foothills of a technological revolution that will shake many industries to their core. The risk of ignoring it are arguably bigger than the risks that dominate today’s newspaper columns.
