(Sovereign Wealth Partners)
Below is the latest colourful dashboard updated on 13 January 2017 by one of our research partners, Ineichen Research & Management (IR&M). You may recall, IR&M is one of several research sources that guide our investment decision making. They are Swiss based and provide a detailed global view of the many drivers of investment markets. Like us, they believe that in the long run investment returns are driven by the fundamentals (the prices today will ultimately revert to what various things fundamentally ought to be worth) but in the short term may be driven more by sentiment and momentum (otherwise known as “technical” signals).
In the the IR&M dashboard, green is good, red is bad. Markets respond mostly to change, so the dashboard in isolation means little as it needs to be compared to a previous dashboard.
This month the picture (Table 1) is almost all green. Almost all global regions have been improving on a fundamentals and momentum basis and most of the changes from the previous month were positive, as indicated by the circles.
Source: Ineichen Research & Management
A refresh on the columns
Looking at each of the factors, broadly from left to right, the first five columns set out IR&M’s interpretation of various recent economic data released in those counties and whether it is generally improving or deteriorating. The EPS change column in the middle is a very important indicator of whether profits estimates for the next year are rising or falling. The final three columns look at the momentum (or technicals) in the various global share markets.
What does this mean?
The implication is that markets have been pushing up across the board, based on improving economic activity with the strongest gains in the so called cyclical sectors, those that are the most exposed to the health of the economy. The red signal for negative surprises in Australia were lower GDP forecasts and patchy consumer confidence. Business confidence, however, has been improving, as has the leading signal of activity in Australia – the services PMI.
Financial markets are forward looking of course and we believe some of the recent strength has to be attributed to President Trump’s policies to deregulate the US and lower taxes.
In addition, the latest views from Farrellys Research & Management
Another source of research we utilise is Farrellys. Farrellys makes no comment on current momentum or short term returns but each quarter constructs an expected return forecast for each main asset class over the next 10 years using a valuation framework based upon income, growth in income (through earnings growth) and long term trends in valuation metrics (price earnings ratios).
At current market levels Farrellys 10 year return expectation is that that the Australian sharemarket may provide the strongest returns (particularly when including the benefit of franking credits), followed by international shares, apart from the US and then Australian commercial property. Return expectations from Australian residential property and US shares over the next decade appear quite modest in the Farrellys model as current valuations look full.