Markets are flirting with all-time highs and rightly so. The world – in economic terms at least – is in a better place. Employment prospects are bright, global growth is on the up and credit is readily available. Corporate results, thus far, have either met, or indeed bettered, investor expectations.
This is a far cry from the six months or so ago when the spectre of deflation and the era of negative real interest rates looked set to dominate the economic landscape. What is it that has fanned the economic flames so suddenly?
The Donald Trump bandwagon has rolled into town, with the promise of higher US growth and “phenomenal” tax cuts. And there it looks set to stay for the foreseeable future. But what is stopping investors from joining in the euphoria? What is the reason for their sitting on the side lines, waiting for that crucial pullback that, quite frankly, will not happen?
If you are asking me for possible caveats, here are two. You could point to the fact that US Federal Reserve chair Janet Yellen may have to raise US interest rates faster than expected in the event President Trump’s policies turn out to be more fiscally lax than first imagined.
You could say the fate of the UK consumer might be another cause of concern, with rising inflation eating into wage packets.
But while this is something we need to pay particular attention to, with all the usual ramifications for domestically sensitive stocks, we do not know for sure if the latest weakness in January retail sales was merely a blip or part of a longer-term trend. More evidence is required.
Back to the here and now, and “animal spirits”, as witnessed by the increase in merger and acquisition activity, such as Tesco’s bid for food wholesaler Booker and Kraft’s aborted bid for Unilever, are on the rise. Expect more deals to be forthcoming; a further reminder to nervous investors that large corporate deals act as a support for the markets.
What is more, the reflation trade has continued to buoy those more economically sensitive areas of the market: the mining companies, the engineers and, broadly speaking, financials.
Many are hoping the rally in mining companies, in particular, will fade (mining stocks remain incredibly under-owned and are universally loathed by investors). They continue to hope that defensive, quality growth stocks will have their day in the sun once more. But there is nothing to suggest this will happen.
Recent profits announcements from cyclically exposed areas of the market were encouraging, with miners and banks generating healthy cashflow. The chances of that cash being returned to shareholders in the form of healthy dividends look high. Yet another reason to own them.
Sceptics will remind me I have told them before that nothing goes up in a straight line. They may point to the fact that stockmarkets have risen for eight years in a row. They could also conclude the general removal of central bank stimulus might mean we are due a down year in markets or that the reflation trade may fade.
But the crux of the matter is this. As an investor, if you could only make one decision over the next three years – to buy or to stay in cash – now is time to buy. Do not hang around hoping for a pullback in stockmarkets at a time when global growth is picking up. It is time to get involved.
Richard Buxton is head of UK equities at Old Mutual Global Investors