News headlines last Friday highlighted a drop in world markets. Markets have recovered somewhat since last week’s drop and while we plan for volatility in our modelling, it is never welcome, but it is anticipated from time to time.
To put it in context, global share market volatility in the past week saw valuations down since the start of the month partially offsetting the gains of the previous twelve months. Our assessment is that this has been a sentiment driven sell-off with markets digesting a range of issues over the last week; among them rising interest rates in the United States, trade concerns, and apprehension about profit margins as we enter the third quarter reporting season this week.
However, looking through this volatility, there are a range of underlying fundamentals that remain positive for global markets. Three key themes underpin share market valuations:
• Economic growth: leading surveys and leading indices point to further expansion. Markets have historically fallen in reaction to the fear of recession and presently traditional recessionary indicators are not present (such as interest rate credit spreads, significant inflation or inversion in yield curves).
• Earnings growth: company forecasts still remain positive with expectation of further growth over the next 12 months; and
• Valuations: the MSCI global share market index is now valued at 14.7 times annualised company earnings. This is 10% below the long run average multiple of 16.
Whilst further bumps in markets will inevitably occur, our client portfolios are highly diversified, and the overall portfolio weighting is based on individual risk tolerance and objectives. This long-term strategic approach to investment is supported by substantial evidence as we position for both stable and volatile markets.