would not be too concerned, if the Fed cut short-term rates. Recessions generally occur due to external shocks or poor political decisions. One of the real risk factors is the tense trade war between China and the US, which basically is rooted in a strategic, long-term power-political struggle. Yet, the recent, fragile “truce” between the two countries, which could remain in force until the 2020 US presidential election, will produce some degree of stability. The recent, fragile “truce” between China and the US could remain in force until the 2020 US p residential election Low interest rates make equity markets shrink The accommodative monetary policies also cause equity markets to shrink, and fewer shares issued will, all else being equal, make share prices increase. This has been the case in the US and the UK for the past five years and in Europe particularly for the past two years. Currently, the number of shares outstanding is falling at 1-2% per annum in the US and in the UK and at about 0.5% in Europe. The reason is that corporate cost of debt is some 3-4% less than the price of their equity. This gives companies an incentive to reduce the relatively expensive equity through share buybacks. External investors such as private equity funds are also taking advantage of the situation by acquiring businesses and taking them private. Growth in Europe remains structurally challenged, whereas the US is more robust, supported by a continued upward trend in housing prices and household incomes growing at an annual rate of about 4%. Another important factor to consider is that the d evelopments in China and emerging markets now have a greater influence on global growth than Europe and the US. In fact, the Western economies account for less than 25% of growth as compared with 50% just ten years ago. For that reason, we do not believe that a global recession is imminent. An environment in which ‘growth’ may be of high value The prospects of continued low interest rates has major investment implications. Firstly, low interest rates provides long-term support for many asset classes, including equity markets, because interest rates are the key anchor for valuation. Secondly, the v aluation of growth and equities with long ‘duration’, i.e. equities with sustainable business models, may remain high and could even rise further. Such an environment without strong growth and little inflation may, on the other hand, make it more difficult for cyclical and value stocks, which rely on growth and inflation to ease the pressure on their business models. Emerging Markets Although Emerging Markets have underperformed Western markets slightly in 2019 so far, we remain positive on the prospects, especially for Asia. Two important general elections have been held in India and Indonesia with reformist g overnment leaders Modi and Jokowi, respectively, both winning re-election to a new term. Although their victories came as no surprise, they strengthen the long-term investment opportunities in the two countries. Lastly, current valuations in emerging markets are b elow historical averages, which we find attractive as this region is a major source of global growth. Although the re-elections came as no surprise, they strengthen the long-term investment opportunities in India and Indonesia. Positive, but risk-balanced investment approach Overall, we continue to see an attractive combination of m oderate economic growth and continued stimulative monetary p olicies. This is a good mix for equity markets. However, we are in the late stage of a ten-year equity market bull market, hence we recommend a balanced investment strategy.
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