After a volatile few months for global equities, Ten Cap investment chief Jason Todd described the equity market outlook as constructive despite ongoing concerns surrounding global trade and growth.
“We believe the US can now avoid a recession, and that in and of itself should account for a lot of the recovery in equity markets, regardless of whether there is a wide confidence interval around final tariff outcomes and where economic growth settles,” the CIO said in a recent market outlook.
Although investors still face a slowing global economy, potentially higher inflation, a modest earnings downgrade cycle and further unexpected announcements from the US President, Todd said these are not “insurmountable problems”.
“No doubt, equity markets will continue to lurch from one concern to another, but a deep beta-driven sell-off is unlikely to occur outside of a return to recession fears,” he said.
“We realise this might appear optimistic given the recovery seen to date and where equity market valuations are now sitting.”
However, Todd flagged multiple factors underpinning Ten Cap’s constructive view, such as a still growing global economy, a relatively insulated Australia and the unlikelihood that bond yields will unwind risk assets.
Ultimately, with markets nearing early-year highs and “unquestionably” eroded macroeconomic conditions, the CIO said investors face a conundrum on whether to lock in gains or ride out the volatility wave.
“Arguing that markets will encounter volatility versus arguing that there is meaningful downside are two different things. The first is a certainty, given the long list of risks. The second is less certain, and we don’t think this is something to position for,” he said.
On the whole, the chief investment officer concluded: “We don’t think the picture is that dire”.
“The US economy, while slowing, is doing so gradually. Most financial markets have experienced a tightening in liquidity, but debt markets are functioning, and financial conditions are not onerous.”
In a similar note in April, Todd said he was withholding judgement on whether the US exceptionalism narrative had lost its edge, or if the case for maintaining a strong allocation to the world’s largest economy still holds.
“I do not know if US exceptionalism has ended or whether ex-US asset allocation is suddenly more appealing,” Todd said in an April market outlook. “Only time will tell.”
What’s clear, according to Todd, is that the US continues to host the world’s largest pool of high-quality growth companies, commands a dominant lead in corporate profit margins and sustains a flexible economy despite ongoing policy uncertainties.
