The performance of equity markets so far this year demonstrates how quickly perceptions of the prevailing macroeconomic background can change. The first six weeks saw sharp falls amid tumbling commodity prices and gloomy media coverage promoting fear of a China-led global slowdown. However, a rebound in commodity prices from mid-February swiftly induced an about-turn in sentiment and more constructive commentary on China. Alongside further supportive intervention from the European and Japanese central banks, this has prompted a strong recovery back towards market levels at the start of the year.
What are we to make of these swings in sentiment and, more importantly, which mood will prevail in the long term? The world has significant challenges but it is our strong contention that long-term investors benefit from a positive outlook as opposed to being over-sensitive to fears of the day. To put this view into context it is worth highlighting that, measured at purchasing power parity, the world economy has grown in every year since 1946 - even in 2009, in the wake of the global financial crisis (albeit only just).
Despite our long term positivity, one cannot ignore short term risk. Clearly, the likes of geopolitical upheaval and financial crises are real and ongoing threats, but investing for economic disaster is not an effective long-term strategy and swims against the tide of consistent global growth. History shows there have generally been two main drivers of serious bear markets: recession and aggressive hiking of interest rates. Neither of these outcomes looks likely today and this gives us some confidence that sentiment will not materially deteriorate from here.