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Equities are retreating after the total world market cap hit a record last week. The current adjustment in global equities viewed in isolation is not concerning, ‘anzi’ it is expected when markets hover around all-time high. These adjustments also provide an entry point for the long-term investor and trading opportunities for the short-term speculator. Over a long-term investment horizon such days will not be remembered.
However, equity markets, like all investment markets, do not live in isolation. Equity markets breathe economic growth and digest interest rate expectations and the recent adjustment in equity prices reflects a shift in these expectations.
US Interest rate outlook – Investor this week shifted forward their expectations for the first US rate hike. As equity valuations today are represented by complex mathematical models, this shift in expectations probably led to a profit taking race amongst institutional investors, who are the first to have access to model results. For a long-term investor the shift in expectations represents a positive because it also means that the US economy is going to recover faster, and isn’t that what we really want? I would not be too concerned regarding increasing interest rates as equities perform best when interest rates are increasing. I would use short-term adjustments as an opportunity.
European Economic Growth – European economic growth is not consistent, but this is not a new fact. Stable economic growth is not possible with two of the largest economies, France and Italy, hampered by inadequate economic policies, the UK threatening to leave the Union and several others with youth unemployment over 20%… Consistent economic growth is not possible. Thus what we recommend is investing in cash rich, large-cap firms with a global reach, preferably operating in countries with efficient rules like Germany. These firms are less sensitive to political intervention. Most importantly they generally provide long term growth. May I stress our 1 year price target in in-line with a long-term investment horizon as is recommended when purchasing equities.
The Airline Industry – We have been recommending an overweight position in the airline industry for some time. Recent communication from European airlines indicates that they had over- estimated their supply of seats especially on transatlantic flights. The adjustment in price has been severe. Going forward I expect a reversal of this trend based on stable increase in demand for seats and a declining fuel price. At current prices patience is recommended as a recovery is realistic. Airlines are a volatile industry thus large market movements are expected.
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