Anyone who is investing online in equities, either through funds or their own stock picks, is likely to have done very well over recent years. Of course, some will have done better than others by dint of having picked better performing funds or shares, but an investor would have had to have made a fairly spectacular series of very bad picks to not have recorded strong profits. Major equities indices such as the Dow Jones Industrial Average, S&P 500 and our own FTSE 100, which closed to a new record high last week, are on or close to their longest ever bull runs. Net average profit margins are also at or near historic records highs.
There is considerable debate between analysts over whether we are now approaching the end of this cycle (though the same debate was raging this time last year). Some point to factors such as low leverage or rising costs likely to mean profit margins have now peaked that they feel indicate the end is nigh. Others highlight strong and improving macro-economic factors, an uptick in M&A deals, capital flowing back to developed markets from emerging markets, while emerging market economic growth prospects remain strong, as indicators the good times should keep on rolling for a while longer.
One thing the bulls are agreed on is that strong global growth is crucial to the continued help of developed market equities. For large international companies, emerging markets are key to growth. Growth in the sales of consumer goods from smartphones to whisky and internationally branded washing detergents can be achieved but doesn’t compare to growth in developing markets whose consumers are getting richer. That’s where the growth figures that impress investors when earnings are reported come from.
As such, a recent piece of analysis from Saxo Bank stating that global trade is slowing will be greeted with concern. Global trade growth is inextricably linked to the growth of global GDP. It’s generally a little faster but a slowdown in global trade growth is likely to be followed by a slowdown in global GDP growth. And global GDP growth is crucial to growth in everything companies listed in developed markets sell, from iPhones to pharmaceuticals.
Christopher Dembik, Saxo Bank’s head of macro analysis, believes that macro-economic is beginning to indicate that the ‘Goldilocks era is definitely done’. He puts this down to trade protectionist measures being implemented by the USA and a ‘negative China credit impulse’. That refers to the amount of new credit being issued in the country and a drop indicates concerns around future market conditions.
Dembik points to South Korean trade’s quality as a strong proxy for wider global trade, excluding the US, due to its historically close correlation. South Korean data also tends to correlate well with global industrial production. He believes the fact that the country’s industrial production has recently dropped into negative growth year on year means global trade growth will also show signs of slowing in coming months. He also points to the rate of borrowing by Chinese companies leading global manufacturing PMI by 12 months and the fact it has recently dropped.
The good news for those investing online is that they can keep a close eye on global trade growth and global GDP growth and react accordingly. It usually takes some time for contractions to then pass on to revenue growth and profit margins of developing market equities.