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Four reasons for confidence despite market woes

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Summary

Trade tantrums and tech troubles are spooking markets and putting pressure on stock prices. But we think fundamentals drive markets, not sentiment.

2 min read

A tit-for-tat trade tiff between the US and China is in full swing while the technology sector is under fierce scrutiny.

Facebook CEO Mark Zuckerberg is testifying to a US committee this week about data use and President Trump has tweeted tax allegations about Amazon.

All this has shaken market sentiment, with most major indices around the world falling last week. But in our view, it doesn’t paint the complete picture of the economic fundamentals that really drive long-term market returns.

Here are four reasons why we think investing remains the best way to make the most of your wealth.
 

1. Companies are making money

Earnings season for the first quarter of the year is just around the corner, when companies tell the world how they are faring financially.

Expectations are for healthy profits across the board. According to the Institutional Brokers’ Estimate System – which gathers the estimates of stock analysts – corporate profits are expected to rise this year by 34% in Japan, nearly 19% in the US, 8% in the UK and 7% in Europe.

While this growth is expected to slow over the following two years, profits growth will remain strong. Strong results will boost share prices, and profits are likely to find their way to shareholders in the shape of increased dividends.
 

2. There is good value out there for selective investors

While the major stock markets have slipped this year, there are many areas of the market offering long-term opportunities for investors who have done their homework.

Emerging market debt, for example, has benefited from improving emerging market economies and a weaker US dollar, and our holdings returned 3.4% over the first few months of 2018. In the meantime, investors, such as Coutts, who have used active stock selection in the technology sector means they have avoided the worst of the falls with lower exposure to the stocks most affected by the bad news flow. While the broad tech sector has fallen -0.3%, our tech holdings returned 1.2% over the first quarter of the year.

 

“Anyone holding substantial amounts in cash will find that the value of their wealth is being steadily eroded and their spending power diminished.”

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3. Economic fundamentals are still strong

At Coutts, we continue to be guided by long-term economic fundamentals rather than day-to-day headlines, and those fundamentals tell a good story.

For example, Purchasing Managers’ Indices (PMIs) – which reflect the economic health of a country’s manufacturing sector – are positive across the globe. PMIs track new orders, inventory levels, production, suppliers’ deliveries and employment, aggregating it into a single figure. PMIs from the US, UK, eurozone, Japan and China all indicate that the manufacturing sector is expanding.

Wages are increasing as well. Average hourly earnings in the US were up 2.6% year-on-year in February, according to the Bureau of Labor Statistics. And data from the UK’s Office for National Statistics shows wages in Britain shot up faster than they had in over two years in the three months to the end of January.

Meanwhile, the International Monetary Fund has raised its growth forecast for the global economy to 3.9% in 2018 and 2019.

Strong growth is unlikely to be thrown off course by the current tariff row. Tariffs, while news, are not new for markets. President Obama introduced them and Ronald Reagan famously put them on Japanese motorbikes to protect the Harley Davidson, and global growth remained strong through those presidencies.
 

4. Investing beats inflation

Inflation may be falling marginally – down from 3% to 2.7% in the UK in February – but it still poses a real problem when it comes to protecting the value of your wealth.

Deposit rates for cash remain lower than inflation. Anyone holding substantial amounts in cash will find that the value of their wealth is being steadily eroded and their spending power diminished.

While the value of investments can go down as well as up, over the long term investing can be an effective way to keep up with rising prices.
 

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

About Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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