The International Monetary fund (IMF) and its team of economists have update their projections for the World Economic Outlook and they are looking slightly improved from their previous outlook in July.
For Advanced Economies, expectations are for an improvement to 2.2% GDP growth (from 2016's 1.7%). Slowing slightly for 2018 to 2.0%.
As I have discussed on many occasions before (and as recently as last week in my blog onVolatility), this growth, which includes 2.2% GDP growth for the US in 2017 and 2.3% in 2018, is in line with the 10 year average. It, however, is hard to see this very average growth as a proponent for well above average equity price to earnings ratios some 20% or more above their 10 year averages.
Clearly all that is potentially positive is more than built in to current equity pricing (including US tax reform).
So, what would be the rationale or incentive for putting cash to work now in global and especially US equity markets? It would appear, with all the good news built in, that there is significantly more downside risk.
Here is what the IMF thinks about the potential downside:
"Risks to the baseline are broadly balanced in the short term but skewed to the downside in the medium term. Short-term growth could increase further, as stronger confidence and favorable market conditions unleash pent-up demand, but setbacks are possible. With high policy uncertainty, missteps -which the baseline assumes will be avoided- or other shocks could materialize, taking a toll on market confidence and asset valuations, and tightening monetary conditions".
If risks are skewed to the downside in the medium term, it suggests to me that buying equities at current prices would require a much larger risk premium than what currently exists.
As we manage risk, first and foremost, in our High Rock models, we need to take this situation into all of our decision making. Specifically because we manage our and our clients money for the long-term (based on the goals identified in our respective Wealth Forecasts). In essence this is our definition of disciplined investing: not chasing returns for short-term growth, but making tactical, short-term decisions that will lead to long-term sustainability in the growth of our portfolios. If that means patiently waiting for opportunities to evolve, then that is what we shall do. We will not force investments into our models for the sake of having investments.
If current prices and valuations do not make sense (i.e. there is not enough risk premium built into pricing), then we will not put our or our client's money at risk.
We have a fiduciary responsibility to protect our clients (which I have written about on many occasions) and this means that we have to be ultra careful that we are totally prudent with our investing strategy.
We need to look well beyond the current economic, political and investing climate to determine how risk plays into the management of portfolio strategies. So that is what we do.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist