Larry Hatheway on Markets – Sept 2018
GAM Investments’ Larry Hatheway outlines his latest multi-asset views, discussing what has caused the sharp bifurcation of market performance this year, whether equity markets will be driven by rotation and fresh leadership, and the key risks to markets for the remainder of 2018.
Markets have been highly differentiated in 2018. Strong outperformance from the US market,
underpinned by the information technology sector, has coincided with clear underperformance of
emerging equity, local currency and debt markets. Europe has also stumbled. That is a big departure
from last year.
What lies behind this divergent performance? In part, it reflects investor caution following the volatility
of markets in the first quarter, even if the reasons (inflation fears) have since receded. A strong dollar,
which has hurt emerging markets, is a further factor. That partly reflects the strength of the US
economy, which has shown a more convincing mid-year rebound in contrast to other parts of the
Dislocations and stresses in certain parts of the emerging world, such as Turkey and Argentina, are
also beginning spread more broadly across the asset class. The riskiness of emerging markets tends
to reinforce the tendency to look for stability, quality and certainty.
Against that backdrop, a key question is whether there will be new market leadership in the final
months of 2018. For that to happen, we must see a change in the fundamentals, with confidence
restored in growth outside the US. Europe and the emerging markets have to demonstrate a more
convincing macroeconomic story.
To date, that is not present, particularly in emerging markets where, if anything, rising risk premiums
and a higher cost of capital risk are undermining growth. An end to dollar strength is also required.
While the dollar has stopped appreciating, emerging currencies remain weak, which tends to push up
credit and inflation risk premiums in those markets.
Lastly, we need to see a decline in geopolitical tensions, particularly as regards trade frictions. At
present, concerns of a further escalation are mounting instead. The risk is that trade disputes
undermine corporate optimism and as a result dampen capex and employment.
Unexpected inflation remains the biggest risk to the cycle and markets. If inflation were to pick up
significantly and unexpectedly in the US, Western Europe or Japan it would change the expectations
for monetary policy and drive up interest rates and risk premiums, resulting in market setbacks and
In short, the bifurcation of markets reflects both divergent fundamentals and investor concerns about
threats to economic and market stability. Rotation and fresh leadership require a change in those
factors, which – for now – appears difficult to envisage.
The views expressed are those of Larry Hatheway (Group Head of GAM Investment Solutions and Group Chief Economist, GAM).
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