Have US Markets run out of rocket fuel?
30 October 2018
Investors now need to understand that the rocket fuel has run out and the coming year or two will prove much tougher for the real economy.
Markets around the world have fallen sharply so far in October,
shaking investors out of their comfort zone. Why is this
happening? In my view, it’s very simply a question of gravity –
the US equity market has been on a diverging trajectory from
reality: stocks have been hitting peak valuations as corporates
have been reporting peak profitability, whilst the clouds are
gathering on the horizon.
The evidence is there in the valuations: the US was, as of
Friday, on a PE ratio of 21.6x and a P/BV of 3.3x, a 13% and
30% premium to the 10-year average respectively, and at a
significant premium to international markets.
Inflation starts to bite
The US economy was already doing well, then it was boosted
by an unprecedented tax cut, further fuelling short-term
profitability. But that tax cut is a one-off event, the new tariffs
on imported products and the oil price recovery over the last
year have resulted in growing inflationary pressures. Hence the
Federal Reserve has had to respond with an acceleration of the
interest rate cycle.
With inflationary pressures growing, an increasing number of
corporates are guiding profitability expectations downwards
for 2018 and 2019, citing the negative impact of rising costs and
the burgeoning tariff war.
International markets appear to have been reflecting this
scenario more accurately year to date and now the shakeout
would seem to have finally arrived Stateside. Investors now
need to understand that the rocket fuel has run out and the
coming year or two will prove much tougher for the real
As long-term fundamental investors, we continue to find
attractive opportunities in every sector and region, irrespective
of the prevailing conditions. Moreover, this environment of
macro-driven uncertainties helps to underline the benefits
of stock-focused portfolios based on in-depth research and
regional expertise, rather than those which are dictated by
macro factors or market-directional strategies.
This information is issued and approved by Martin Currie
Investment Management Limited (‘MCIM’). It does not
constitute investment advice.
Past performance is not a guide to future returns.
Market and currency movements may cause the capital value
of shares, and the income from them, to fall as well as rise and
you may get back less than you invested.
The opinions contained in this document are those of the
named manager(s). They may not necessarily represent the
views of other Martin Currie managers, strategies or funds.