Markets have been happy to ignore political complications from Washington, to Barcelona, to Downing Street, and instead, have focused on improving global growth and exciting innovations in the world of technology. Japanese markets enjoyed a particularly impressive month, as the Nikkei 225 Index clocked 16 consecutive days of gains and is, at the time of writing, up 15% year-to-date. Japan in fact has been the exception to the rule of weak politics versus strong markets, as Prime Minister Shinzō Abe secured a resounding victory in Japan’s October election.
During October all of the major economies reported their third-quarter GDP growth rates and these made for heartening reading. It was particularly encouraging to hear that the US economy managed to achieve 3% growth between July and September, despite a heavy hurricane season. Contrary to plenty of gloomy headlines, the UK also delivered progress ahead of expectations in the period. Within this context of improving economic growth rates and high market valuations, there was some trepidation that central bankers may have been more hawkish in their recent policy announcements, but there were few surprises, as seen in bond markets holding broadly steady through the month.
With markets trading on high multiples and having gone many months without a notable upset, it is understandable that some commentators have been expressing caution. History tells us that investors must be prepared for difficult periods and that volatility rarely remains at such low levels for an extended period. The world is currently awash with cheap capital created by loose monetary policy and this has pushed asset prices ever higher. Central bankers have a job ahead of them if they are ever to return to “normal” policy conditions without causing upset, but the current optimistic economic backdrop is a good point to be starting from.
Meanwhile, in a world that appears to be increasingly tied up in regulation, it was interesting to see Chinese president Xi Jinping tear-up the rule book this month by declining to appoint a potential successor, hinting that he may not wish to step down at the expected end of his rule in 2022. Xi’s address at the Communist party congress lasted a mere three hours 23 minutes – it seems that there may be many more to come.
Fred Mahon, Fund Manager of Coleman Street Investments