5 December 2019
We asked a number of our fund managers whether they believe we are now in a late cycle environment and what the implications are for their respective asset class.
Investment Director, Global Macro & Currency Fixed Income
I would use the term ‘late cycle’ to describe the US economy and the UK economy. I do not think the term applies so much to Europe, Japan or even China. The UK and the US may very well be late cycle but Brexit and trade concerns are distorting things. Perhaps ‘late quantitative easing (QE)’ is one of the more useful ways of looking at things. In my view, central bankers are coming to a realisation that the distortionary effects of QE are now becoming more significant. Therefore I believe we are at a point where, going forward, there will be less QE, more reliance on fiscal policy and in that environment there is going to be more opportunity coming through and driving markets.
Investment Manager, Luxury Equities
The question of whether we are in a late cycle environment is not as relevant to the luxury sector because there are two countervailing forces at play; the structural thematic — the dominance of the rising emerging middle class consumption — combined with the short-term fluctuations of the economic cycle. From present experience, it appears that the former is the dominating cyclical.
We remain comfortable. That is not to say luxury is immune to the economic cycle. Clearly in 2009 we did see a short sharp blip but the sector recovered very sharply. What we are more mindful of now is valuation. We think earnings remain well underpinned, however we are focused on what we should be paying for those earnings.
Investment Director, European Non-Directional Equity
It is no secret that all the economic statistics one can look at are indicating quite a slowdown across the globe and this is being reflected in earnings estimates. For example, the average European company is supposed to grow 2% this year, whereas at the beginning of the year people expected 10%. I believe that in such an environment it is very important to focus on the right companies, ones that on the long side can produce positive growth and surprises despite the average company in the market not growing at all.
Investment Director, Healthcare Equities
The term late cycle mostly relates to the business cycle. In healthcare it is a little different. Here what matters is the product cycle, which is driven by science, pipeline development and new technologies. We are actually witnessing an unprecedented wave of innovation and I would expect that many more products will hit the market in the coming years. Therefore in terms of products I would say we are midway through the current cycle.
Investment Director, GAM Systematic
It definitely looks like it. However, as a systematic manager, we do not have much of an outlook or even a perspective on late or early cycle management. We invest according to our indicators and our quantitative systems which are not necessarily linked to any cycle management.
Investment Director, Emerging Markets Fixed Income
I think that is the feeling everywhere. Obviously it has been a very long expansion going back to 2009; certainly this is the longest of my career and pretty much anybody’s career. Also with the inversion of the yield curve there are more and more signs that we are indeed in a late cycle environment.
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