Global economy 'will muddle through'

Mr Kevin Gardiner, global investment strategist at Rothschild Wealth Management, discusses his outlook for global markets with Jeremy Koh in the latest in our series featuring fund managers and leading market experts.

Kevin Gardiner, global investment strategist at Rothschild Wealth Management.
Kevin Gardiner, global investment strategist at Rothschild Wealth Management. PHOTO: ROTHSCHILD WEALTH MANAGEMENT

Investors have been beset with worries this year. They fear a major slowdown in China and that the nascent United States recovery will falter - leading to a sharp fall for global stocks. Another big concern is whether the oil sector, stricken by plummeting crude prices, will drag down the rest of the market.

Investment strategist Kevin Gardiner, however, is more sanguine. This is not the start of a global crisis, he notes. Also, stocks in the US and Europe are reasonably valued, and some are even cheap, he adds.

He advises portfolio managers at Rothschild Wealth Management, which has about €21.6 billion (S$33 billion) in assets under management. It focuses on preserving and growing the wealth of families, entrepreneurs, charities and foundations over the long term.

At the business, the usual return target of a medium-risk portfolio is 3 per cent over inflation for the long term. The inflation benchmark depends on the base currency of the portfolio. For example, a US-dollar portfolio would take the US consumer price index (CPI) as the benchmark while a British pound portfolio would use Britain's CPI.


I'm more optimistic on technology companies that manufacture products that give consumers new experiences. Some of these companies have been tested through downturns.


Q What is your global outlook?

A People have been talking as if the global economy is structurally flawed and we are just one moment away from disaster.

Our view, however, is that it will "muddle through" with the most important economy, the US, growing at 2 per cent to 2.5 per cent. It isn't going to face a big crisis just yet.

Q Why do you think the US will grow at that rate?

A The readings of the ISM Manufacturing PMI, which tells us where we are in the business cycle, are still in reasonably healthy territory. It has been above 48 since June 2015. Recessions occur when it's between 40 and 45.

Further, the jobs created in the non-farm sector are trending at close to 200,000 per month, which is reasonably solid.

Also, if you look at the US private-sector cashflows, they're still positive. In other words, households and companies are saving more than they are investing in capital assets. Such assets could be houses, in the case of consumers.

As a result, it's making funds available for the rest of the economy.

In periods before big financial accidents in the early 2000s and 2008, private-sector cashflows were negative, with the US consumer, in particular, borrowing recklessly. But recently they haven't been borrowing recklessly. Until they do, I'm going to think they're doing okay, and that's probably the most important reason why I'm giving the US economy the benefit of the doubt still.

The level of growth we are expecting is consistent with what these indicators are showing.

Q How do valuations look to you at present?

A If you look at price-earning ratios of main stock indexes of the US and Europe, valuations are still not expensive. Note that to calculate these ratios, we use the average yearly earnings over a 10-year period, to adjust for market cycles.

In the US, these ratios are just slightly above their 10-year averages. In Britain and Europe, they are lower than these 10-year averages.

Hence, we are looking to pick up bargains when the market is volatile.

With the growth rate we are anticipating, once the energy sector has stabilised, Standard & Poor's 500 Index profits will probably rise by perhaps 5 to 10 per cent. Hence, we think US stocks have some room to rise.

Q The oil sector has been hit lately. What is your take on this?

A We are not particularly negative on it as there is a lot of bad news already in the price. For example, the price-to-book ratio for the global oil sector was lower recently than in 1998, which was when oil prices briefly went down to about US$10 per barrel.

We wouldn't be surprised to see the sector do relatively well as a whole for a while. One of the stocks we have been adding to is actually an oil field services company because the price had fallen too far.

Q What is your advice to investors?

A You always want to own some consumer goods companies that are household names and have a great collection of businesses which will be around for long after we will.

They will be boosted by rising living standards. On the basis of history, we would say the human race will get better off as a whole in the long term. Living standards have risen steadily for as long as we can remember, albeit interrupted by recessions. When living standards rise, consumer goods companies will do well as spending on things like food, drink, household goods increases.

Companies with a huge spread of businesses in these areas will likely be able to capitalise on this. Examples of such firms are Nestle and Unilever, though these are just illustrations, we don't necessarily own these firms. I don't normally provide stock picks.

Q How would one pick such firms?

A We ask ourselves if such firms are just, as they say, "flashes in the pan" or if they've been around for a long time. The latter companies have, say, a 50- to 100-year history and have shown the ability to weather past business cycles.

However, we still research such firms to see if we indeed want to hold them for the long term.

Q What other sectors would you recommend?

A Technology. Long-term innovation will drive the sector. The sector is not expensive, and its balance sheet is sound.

Q How can the lay person go about investing in technology?

A We recommend holding a basket of, say, 10 technology stocks instead of trying to pick a winning firm.

One way to do this is to buy all the technology companies in a stock index like the Standard & Poor's 500 Index. Another way is to invest in a fund that invests in many technology stocks to get the benefits of diversification.

Q Which sub-sectors in technology are you more optimistic on?

A I am less keen on companies that draw a lot on advertising revenue, like social media businesses. This is because it's an untested business model as such firms have not been through downturns in a business cycle.

I'm more optimistic on technology companies that manufacture products that give consumers new experiences. Some of these companies have been tested through downturns.

For example, there is a company in Asia called Taiwan Semiconductor Manufacturing which makes semiconductors. They've been around for quite a while and been tried and tested. Samsung is another company that has been around for a long, long time and has some credibility.

Again, these names are illustrations, we don't necessarily own them.

Q People have been worrying that the slowdown in the oil and gas sector may spread to other sectors and cause a downturn. Do you agree?

A It's true that markets have been worrying about lower oil profits and how that will affect employment and other companies selling to the oil sector.

However, I think the fall in oil prices is a net benefit. In the past, sharp falls in oil prices have normally been associated with good growth.

When this happens, money is essentially being transferred from oil producers to oil consumers.

This income redistribution favours consumption as oil consumers spend more of their income than oil producers.

Hence we think consumption will be boosted going forward and you in fact already see this in the US, where it is continuing to grow.

This is another reason why we think the underlying picture for the US economy is not too bad.

A version of this article appeared in the print edition of The Sunday Times on April 17, 2016, with the headline 'Global economy 'will muddle through''. Subscribe