Macroeconomic conditions are “almost incidental” to the present market conditions

Nick Griffin, chief investment officer of Munro Partners, says that for the next three years at least, the prognosis is “quite frankly, pretty good.”

Monetary tightening, which caused interest rates to rise from around zero to over five percent, he said, “effectively cleansed the financial system” and set the stage for a long-term upcycle. He made these observations last week during a GSFM media conference in Sydney.

“In my experience, a really simple observation – when you cleanse the financial system of all its excesses, which you just did in 2022, you generally have a long period of calm afterward,” Griffin continued.

He went on to say that similar incidents were seen in the years following the dot-com catastrophe in 2002 and the global financial crisis from 2009 to 2018. The fact that the current cycle of rate hikes since 2022 has not brought about a recession is still “extremely encouraging.”

“You’re now in a situation where central banks have normalized rates, the economy has not imploded, and you ultimately have an economy that’s bouncing along the bottom. Central banks basically have 500 basis points up their sleeve to manage a very long and sustained upcycle from here,” he further stated.

Griffin used this to suggest that markets are at least a year into the next expansionary phase.

He noted that the recent downturn has already shown robust profit growth for some of the biggest corporations in the world, supporting the idea that “the equity market is not the economy.”

According to him, a number of thematic trends have boosted earnings, such as the use of artificial intelligence by chipmaker Nvidia and GLP-1 agonists by pharmaceutical company Eli Lilly, which are now approved by the FDA to treat obesity. This “very narrow” growth in earnings is expected to broaden as the macroeconomic environment changes.

“Interest rates have peaked, and so from here, rates are either flat or down, and earnings will grow,” Griffin continued.

“Right now, earnings growth is very narrow among the biggest companies, but that will ultimately broaden out because, at some point, central banks are going to cut rates and the economy is going to recover.”

Given that Munro Partners has been “fully invested” for more than a year, all of this has bolstered the case for the upcoming bull market cycle. 

“All our funds were up over 35 percent on the last 12 months on a rolling basis. That’s a big number, but it’s important to flag that you’re coming off the bottom of 2022. That’s what you’d expect in the first year of a bull market,” Griffin conveyed.

“Going forward, returns won’t be as good as that, but they should still be positive.”

Additionally, Stephen Miller, the investment strategist at GSFM, feels that the recent performance of the market is less indicative of a broad rise. 

“The consensus view at the commencement of 2024 was one commonly described as ‘Goldilocks’, a resilient economy in which inflation declines to an extent that central banks can make significant cuts to policy rates,” he stated.

“This is an ‘immaculate disinflation’ scenario in which bond yields fall and equity markets are pushed along by powerful tailwinds associated with central bank easing and falling bond yields and continuing economic growth.“

“Certainly, ‘Goldilocks’ has propelled US equity markets to all-time highs. However—at least until very recently—that has been more reflective of a thematic and relatively narrowly based rally focused on technology rather than a macro rally excited by immaculate disinflation and attendant central bank easing and falling bond yields.”

He expressed confidence that a thematic rally may continue, even though it is debatable to what extent it would do so in the future.

Crucially, though, Miller said that it is “hard to see” macro factors deviating from the current track given that the US Federal Reserve and bond markets are now more in line with regard to rate reduction expectations, inflation appears to be trending down, and activity growth appears to be slowing.

“In other words, the ‘macro’ dynamic potentially reinforces the ‘thematic’ elements that drove the first half rally in risk markets,” he said.

Ahead of the US elections and a hypothetical Trump triumph, Miller noted, the macro situation is “almost incidental” to what investment executives are looking for in their own markets.

“[The election] might matter at the margins, but I think there are bigger things happening, whoever is president,” he said.

- Published By Team Australia News