The year of questioning growth


The current backdrop, I believe, is much better for high-quality, cash-generative businesses that are able to provide sustainable dividends to investors

Global macroeconomic data has deteriorated in recent months. The question for investors now is are we entering an economic recession? Or is this just a blip in activity – the result of trade wars and tightening fiscal and monetary conditions?

Markets are looking for positive signs…

Investors are already well versed in the current global challenges, namely slowing growth in the major economies and heightened political uncertainty from the likes of US/China trade tensions and Brexit.

However, equity markets have risen since the turn of the year. Not only are they anticipating progress in the US/China trade talks (where tensions do appear to be de-escalating), but they have been spurred on by the US Federal Reserve’s newly dovish stance, as it pushes out the prospect of further rate rises.

Even in Europe, the potential for Brexit being delayed past the end of March has been taken as a positive development, due to the prospect of a softer exit for the UK, causing sterling to appreciate against the US dollar and euro (although recent developments have called into question again whether the UK will be leaving the EU with no deal).

…but ignore the evidence at your peril

There is though still uncertainty at the heart of the global economy. In the US, for example, margins are being squeezed in all directions, with labour costs going through the roof and transport costs also seeing large rises.

Corporate earnings expectations have come down a long way since September, driven by a combination of margin pressure, top-line deceleration and the loss of tax stimulus. Estimates might go even lower too, with negative numbers for the first quarter, and the second quarter also at risk, driven by energy, materials and technology sectors. Two quarters of year-on-year negative growth would signal an earnings recession.

Earnings growth estimates have fallen

Source: FactSet as at 18 March 2019. MSCI ACWI consensus 2019 earnings-per-share growth.

While the market anticipates a rebound in the second half of this year, I believe rising costs of transport & logistics, labour, funding, tariffs and materials should temper these expectations.

The best course of action for investors

Even more than usual, the current market outlook demands a highly selective stockpicking mentality, with a laser focus on corporate margin pressure and a keen eye on valuation. Strong moves from here are unlikely and further bouts of volatility should be expected.

As an income investor, there are a number of interesting areas I am focusing on. For example, UK clay & concrete-brick manufacturer Ibstock is tapping into the structural growth of increased housing (as the UK government attempts to reduce a shortfall of around 4 million homes). It hopes to see a strong growth opportunity in the coming years, with a new £55 million factory, capable of producing 100 million bricks per year. This facility allows Ibstock to ramp up production and reduces the need for its customers, the housebuilders, to import expensive bricks from abroad, thereby underpinning demand.

Meanwhile, Dutch science-based company DSM, a high-quality firm with a strong balance sheet, has recently announced some bond refinancing, with the interest rate of its new €1 billion Revolving Credit Facility linked to reducing its carbon emissions. Hitting its targets will lead to lower interest charges, and therefore better profitability.


The current backdrop, I believe, is much better for high-quality, cash-generative businesses that are able to provide sustainable dividends to investors – and dividends may very well make up the majority of real returns from equities to investors for some time.

Important information

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice.

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.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.