Cautiously Optimistic

When asked my view on the global economy and investment markets, I describe my position as cautiously optimistic. I am very bullish on the opportunities over the long term, especially in artificial intelligence and energy, hence my optimism. But I am ever mindful that at any point there are risks to the economy and share market that can lead to a correction and even a bear market. We have been fortunate in the past few years that many of the risks lurking have not happened. That does not mean they will not, in fact eventually some will, hence my caution.

Right now, the world is grappling with several changes, many of which stem from US President Donald Trump’s tearing up of the rule book of international relations and trade. Ordinarily elections come and go and often they are relatively inconsequential to the daily machinations of financial markets. This is different. Trump is taking his opportunity to rewrite the rules of the game and address the perceived imbalances that have become embedded in the global economy.?

While it appears Trump is unhappy with and targeting individual countries, he said it best when he explained that he does not blame these countries for the deals in place, they did great deals for their countries. He blames the prior administration(s) in the US. He is right, these deals and frameworks for how the world works have been decades in the making. The problem the world now faces is the uncertainty that comes with the upheaval of changing the global status quo.

So, after a positive honeymoon period for share markets from November last year, the economic reality is now starting to kick in. Nations, companies, and investors alike are starting to understand what tariffs, trade wars, and Trump mean for them on a more granular level. There will likely be a level of dislocation in markets as changes reverberate through markets. But the dust will settle and regardless of the short-term pain that accompanies the change, the key themes of the future remain compelling.

As markets reached new highs, I am always keen to take profit where stocks become overvalued. We have trimmed exposures to blue chip companies such as Commonwealth Bank and Wesfarmers over the past few months as they have become too expensive. They remain core holdings in our client's portfolio, but it's prudent to take profit and reallocate capital to better priced assets at times like this. Keep in mind that at $165 a share Commonwealth Bank was trading at a price earnings ratio of 28x which is ridiculous. Investors need to be careful not to become attached to stocks.

Companies such as Commonwealth Bank and Wesfarmers have been cornerstone stocks for many investors and there is often a reluctance to sell them. In the investment world, it's important to be as objective throughout the ups and downs of the market cycles. It is common sense, but it is more difficult to do than people appreciate. When a company's share price has performed well, we are inclined to expect that it will continue to do so. However, unless the increased share price is driven by similar increases in profits, those gains will not be sustainable.?

This is where it is difficult to assess the big tech stocks in the US, especially those with exposure to the AI theme. Our client portfolios include companies such as Microsoft, Amazon, Alphabet, Facebook, and Apple. They have all performed very well. Unlike my approach with traditional companies with more predictable earnings, I have not been taking profit on the big tech companies. The AI theme is a decade plus investment opportunity. Stock prices will not behave rationally along the way. However, the opportunity for future revenue and profit is so significant that I am reluctant to sell them despite their valuations being stretched. The growth opportunity over the next 3, 5 and 10 years makes selling them a greater risk. I'm fine with the volatility and if these stocks pull back 10% or 20% or more, I am not really concerned, it becomes an opportunity to continue adding to the holdings. But it is my view that you cannot afford not to have them in your portfolio.?

Remaining objective often means acting counterintuitively. Especially in a world where there seems to be ever mounting risks emerging. The reality is that many will not happen, but certainly some will. Having conviction in the themes you are investing in is critical as is prudently managing capital and not being attached to any particular investment. Your investments must be made based on the future prospects of a company, not the past. Despite the uncertainty in the world, there are always exciting opportunities ahead. So, there will be pull backs and difficulties in the share market and these are not reason for concern but buying opportunities for the long term.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.?

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