Two Sides Of The Same Coin – The Absolute Return Letter

“You can flip a coin to change its face, but it remains the same coin.”

DaShanne Stokes

The battle is on. In the bulls’ camp, enthusiasm is rising. Global economic growth is accelerating; yet inflation is modest – in many countries almost non-existing. Inflation-less economic growth, they call it. On the other side of the table you’ll find a sizeable camp of bears. It is all going to end in tears, they argue. No wonder the average investor is slightly puzzled. What on earth is going on?

One side of the coin – the bull case

The return on US equities since 2009, when the current bull run was first established, has been quite extraordinary – almost 300% to be more precise (Exhibit 1), and the current equity bull run shows few signs of coming to an end.

Exhibit 1:	Total return of great equity bull runs since WW II (%)
Exhibit 1: Total return of great equity bull runs since WW II (%) 
Source: Goldman Sachs Research, August 2017. 
Note: S&P 500.

In defence of the bull case, one has to admit that the current level of investor optimism is more than just wishful thinking. Consumer confidence is growing, and so is business confidence, both of which are powerful drivers of equity returns. The global consumer is now more confident than he has been at any point since the 2007-08 upheaval (Exhibit 2).

Exhibit 2:	Aggregate global measures of confidence
Exhibit 2: Aggregate global measures of confidence 
Source: Barclays Research, Markit, Haver Analytics, June 2017.

The bulls take great comfort from the fact that the global economic recovery appears to be intact, even if the outlook for the second half of the year is modestly softer than the solid growth most countries enjoyed in the first half. Uncertainties surrounding US economic policy under Trump’s stewardship combined with slowing economic growth in China are the two main reasons why global GDP growth is likely to modestly slow in H2.

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