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Looking Forward

In the past weeks we have seen a number of downward revisions to economic growth across the major regions of the world from institutions such as the IMF and the EU Commission. 

These downgrades reflect the still modest recovery we have seen in the US and Europe, as well as continuing headwinds from the slowdown in Emerging Markets and  factors such as the fading impact of lower energy prices. The global economy will still see growth across all areas in 2016 and again in 2017 but not at the pace we would normally see in a typical recovery.

Central Banks continue to be vigilant and pro-active as they seek to support nascent growth either by holding off on interest rate increases (as in the US) or exploring more unconventional approaches (as the ECB is doing). But monetary authorities recognise that to get closer to self-sustaining growth some action on the fiscal side is warranted. Mario Draghi continues to make this point at his press conferences. Monetary policy on its own can’t really unleash the “animal spirits” of consumption and business spending.

The investment reality is that we may be in a period of low (albeit positive) economic growth for some time. One of the immediate impacts of this has been that we have seen significant cuts by analysts to their forecasts for company profits growth in 2016. Consensus forecasts for growth in company earnings in the US and Europe for this year are basically flat. This sluggish earnings outlook, overlain on market valuations which are fair at best, have meant equity markets have struggled to progress so far in 2016.

At Appian, we are firmly of the view that equities are a core long term asset class that can deliver positive and real returns. Tactically within the Appian Value Fund over the past 12 months we have moved down to the lower end of our range. Stock markets are forward-looking and more robust growth in earnings is likely as we move into 2017. There are two key points worth making.

  1. While we are positive, investors need to match their expectations with the market reality. While we certainly foresee positive returns, in a world of low numbers these returns may not match the 10-15% p.a. outcomes we have seen at times in the past. A recent report from McKinsey[i] citing somewhat higher interest rates and inflation and less robust trends in productivity in economies such as the US, mirrors this view.
  2. Stock-picking will be even more critical to investor outcome. Many sectors have been driven to expensive levels as they have been seen as “bond proxies” in a world hungry for yield and even subtle shifts in monetary policy may have a negative impact. Benchmark investing has little to offer in an environment where valuations have become so stretched. Focusing on quality fundamentals such as strong balance sheets, solid return on capital and sustainable cash flow while never losing sight of valuation is, we believe, a superior strategy. 

[i] McKinsey Global Institute May 2016
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This material has been prepared and issued by Appian Asset Management Limited on the basis of publicly available information, internally developed data and other sources believed to be reliable. While all reasonable care has been given to the preparation of the information, no warranties or representation, express or implied are given or liability accepted by Appian Asset Management Limited or its affiliates or any directors or employees in relation to the accuracy, fairness or completeness of the information contained herein. Any opinion expressed (including estimates and forecasts) may be subject to change without notice. 

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Appian Unit Fund Prices  
3 May 2016 
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Patrick J Lawless
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