Welcome to The Outlook archives, where you can view several past issues featuring our investment and economic thinking. The Outlook is available in both PDF* and HTML format. We recommend that you review the PDF format, as it is closer in appearance to our printed version.
“The Future Ain’t What it Used to Be”
Central banks have been responding to an accident-prone and fragile global economy with the most accommodative monetary policy structure in history and are likely to continue this approach for some time. However, monetary policy has its limits and market participants are becoming increasingly concerned that we may be approaching those limits. The resulting uncertainty and volatility have led to distortions in the prices of businesses which create opportunities for patient, long-term investors. This is a good time for investors to have higher cash balances, not as a market call, but rather to be in a position to take advantage of the opportunities presented. Because this is not an environment where all businesses perform equally, actively managed portfolios should benefit. The United States has been the primary beneficiary of this environment among leading economies. As the largest economy in the world and a safe haven, the United States has been attracting significant capital flows as it is the most important, resilient and adaptive of all the major economies. The U.S. is gradually improving in measures of industrial activity, employment, wages, housing, consumer net worth and consumer confidence. However, despite these improvements the Federal Reserve recently declined to raise interest rates even a quarter of a point citing the weak overall global backdrop. This continuation of record low interest rates for the past eight years should be proof enough that monetary policy alone cannot deliver sustainable growth without fiscal policy initiatives which are now needed to support more balanced growth. For investors waiting for a normalization of interest rates, the wait will continue to be long as it requires a return to “normal” economic conditions which cannot occur under present circumstances.
The politics of Economics and the Economics of Politics
“In Europe, the only way to proceed is to proceed as we have always done, namely by following a pragmatic, step-by-step, flexible and rectifiable approach; proceeding only ever as far and as fast as the peoples and governments of Europe actually desire.”
– German Finance Minister, Wolfgang Schauble,
article in the Frankfurter Allgemeine Zeitung, 7/4/15
Volatility, Valuations and Debt
“There are going to be market reactions whenever you’re shifting from an economy that has had very low interest rates for a long period of time to an economy that has more normalized interest rates. While that is a positive story overall, there is a possibility that it will be a bumpy ride.”
– Boston Federal Reserve President, Eric Rosengren in a recent WSJ interview
Investment Opportunities Within An Unbalanced Global Economy
The global economy is undergoing an adjustment process that has increased market volatility while presenting specific investment opportunities for investors who understand the complexity of today’s paradigm shift. There is a lack of pricing power, and in certain industries there are deflationary forces resulting from surplus capacity, aging demographics, excessive borrowings and rapid technological advances. Therefore it is important to have an understanding of the subtle impacts that pricing changes will have on corporate profits and to identify industries and companies that are positioned to prosper in this environment. A focus of our team in 2015 is to target investments in companies that can maintain or even improve profit margins. Importantly, companies that can improve profitability in a world of increasing pricing pressures should command premium valuations in the market, and those shares should be purchased on any market pullbacks.