It’s good advice to get regular medical checkups, even when you feel perfectly healthy. The same applies to an investment portfolio. Currently, you may feel well because the US economy is just progressing into late cycle and the global economy remains in good shape. Nonetheless, you still need to examine your portfolio regularly to ensure it stays well diversified and rebalanced.
Global growth eased but stayed above trend
- Economic data around the world softened somewhat in the first quarter of this year, while continuing to show above-trend growth.
- Manufacturing purchasing managers’ indices (PMIs) in both developed and emerging markets remain comfortably above 50, which signals economic expansion, despite a slip from last year’s exceptionally high levels1.
US recession triggers are still largely absent
- Equity bear markets in the US are usually linked to recessions. At the time of writing, the traditional signals of a recession are benign.
- The household debt-to-GDP ratio remains at a post-crisis low. The corporate debt-to-GDP ratio is back to its 2008 high, but profits have grown even faster and companies are holding more cash.
Keep a finger on the pulse in search of risk
- US trade tension is spreading beyond China towards Europe and other allies, which could weaken business confidence and investment.
- US mid-term election results in November 2018 and UK’s Brexit plan could also spur temporary periods of heightened volatility.
Invest like a Scout: Always be prepared
- At present, the absence of strong recession signals suggests this late-cycle phase may last for some time. Investors need to be prepared to shift risk profile before the downturn comes.
- Investing in long-term bonds may potentially generate capital gains along with income. Investors can also consider rotating within equities away from growth to defensives and focus more on dividend yield as a source of return.
1Source: Australian Industry Group, J.P. Morgan Economic Research, Markit, J.P. Morgan Asset Management. Data reflect most recently available as of 30/06/2018.