Investors must get used to an environment of lower growth


We will have to get used to an environment of lower growth. However, this is the kind of environment in which active managers will truly prove their worth.

“Nobody buys a farm based on whether they think it’s going to rain next year. They buy it because they think it’s a good investment over 10 or 20 years.” – Warren Buffett

Last month I wrote that while I don’t believe there will be a global recession over the next 12 months. What is apparent though, is that we will have to get used to an environment of lower growth. But as the great Warren Buffett alludes to, an anticipated downturn should not weigh on long-term investment decision making.

Yes the global economy is slowing. In its recent report the IMF downgraded growth for 2019 to 3%, its slowest pace since the Global Financial Crisis (GFC). For advanced economies, growth this year is forecast to be 1.7% versus 2.3% in 2018.

Even in my favourite region of the world, Asia, growth is projected to be 5%; the slowest rate of expansion since the GFC. Despite this, Asia remains the fastest-growing region in the world, accounting for over two thirds of global growth.

Subdued economic activity will no doubt hit stock market returns. Volatility will also rise as the effect of monetary policy stimulus measures – low interest rates and quantitative easing – that have supported asset prices indiscriminately over the last decade wanes.

As we embark on this lower-growth trajectory then we will become more vulnerable to bumps in the road. The stock market jitters that were felt following the attack on Saudi Arabia’s largest oil refinery highlighted the fragility of sentiment. At 4% global growth, investors would be more confident the effects of higher oil prices would be possible to withstand. At 3% growth they are less sanguine. There will likely more such bumps in coming months.

However, this is the kind of environment in which active managers will truly prove their worth. Fundamental research and stock selection will return to the fore.

We will have to be particularly alert to disruption and the effects of new entrants across industries. Incumbents that have previously performed well may not be able to adapt. There is also the risk that companies become complacent in an environment where borrowing has been so cheap.

We saw recently at WeWork what happens when “free” money is no longer available. To Buffet’s point – cheap money is available for those that don’t need it. It will now be rarely available to those that do. I think we have seen something of a turning point here.

Increasingly, investors will probably find it worthwhile exploring further down the market-cap scale to identify good quality businesses that could well be the high-flying blue chips of tomorrow. Again, this highlights the importance of intensive research.

Companies that can sustain and grow their dividend will also be important. As we know, reinvested dividends contribute materially to long-term returns. The UK market’s total price return since 2010 has been 35%, but 90% with reinvested dividends.

Due to concerns about Brexit, parts of the UK stock market are now undervalued. As a result, the FTSE All-Share contains many attractive opportunities for investors seeking income.

Investors should not be too distracted by disappointing growth numbers over the next few years. There will certainly be ups and downs but there will also be opportunities to make long-term returns.

There are also growing numbers of good, dividend-paying companies overseas. We are finding good opportunities in Europe, the US and even across emerging markets (EM).

Over the last decade, there has been a real shift in the mind-set of many EM companies when it comes to rewarding investors with dividends. There is a strong dividend growth story in EM too, which is driven by both the growth of underlying cashflows, and rising payout ratios.

As Warren Buffett also said: “Be fearful when others are greedy. Be greedy when others are fearful.”


The above article was previously published by Aberdeen Standard Investments  on 8th November 2019