This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Barclays Wealth Management Head of Equity Strategy William Hobbs on why investors should take all the doom and gloom talk with a pinch of salt.
“If I were a gambler, I would take even money that England will not exist in the year 2000” – Paul Ehrlich (1968)
Paul Ehrlich remains a highly regarded US entomologist, best known for his dire warnings about population growth in his famous book The Population Bomb (1968). In it, he envisaged “hundreds of millions of people starving to death” and “all-important animal life in the sea” becoming extinct by the end of the 70s. That he is still more feted than the environmental economist Julian Simon, who publicly refuted almost all of Ehrlich’s predictions in several weighty tomes perhaps says something about mankind’s appetite for gloom and doom.
For much of the post-Lehman period, various commentators have been trying to sate this appetite with predictions of unending gloom for the world economy. For the most part, the focus has been on the insurmountable obstacles facing the European project and the debtladen US consumer. Both of these caricatures have long been wide of the mark in our view, as regular readers will know well. The UK economy and, in particular, the coalition’s austerity policy has also come in for plenty of criticism from a range of commentators, calling to mind an episode in the not too distant past when then chancellor Geoffrey Howe’s more-austere budget
prompted an open letter to The Times signed by 364 economists. Then, as now, the magi envisaged a bleak future for the UK. With hindsight, we know that these downbeat predictions coincided almost perfectly with the point at which the UK economy started to turn around.
Similarly, this time the UK’s detractors are starting to look increasingly out of step with the incoming data.
Last week, there were signs that confidence within the UK manufacturing sector was picking up appreciably and, this week, it was the turn of the services sector, with the July headline business-activity gauge registering its highest reading since 2006.
The housing market is similarly showing burgeoning signs of life, while the labour market data have long told a different story to the GDP data.
It remains difficult to profit from this from an investment perspective. The large-cap UK equity market depends more on overseas economies for its revenues than the UK, and we continue to feel investors should tread carefully and lightly in the bond market. Even after the impressive rally in developed equity markets so far this year, we still see the greatest upside in the US and continental European markets. It is these two areas where expectations still look easiest to beat. We explore current valuations in a bit more detail inside but, in the main, stocks still look
inexpensive from both an absolute and relative perspective. On the other hand, rising mediumterm growth expectations are unlikely to be good for bonds and we remain strategically very wary.
Now is a good time to remember Julian Simon’s thoughts on the subject –“The material conditions for life will continue to get better for most people, in most countries, most of the time, indefinitely. Within a century or two, all nations and most of humanity will be at or above today’s living standards. I also speculate, however, that many people will continue to say that the conditions of life are getting worse.”
