Melt-up before melt-down?
Roger Blitz, the FT's currencies correspondent, and Luca Paolini, chief strategist at Pictet, discuss how the US 'misery index' (unemployment rate + inflation) has fallen below 6 per cent for the first time since 1998, suggesting we are one to two years away from a major peak
Produced by Alessia Giustiniano, edited by Petros Gioumpasis, filmed by Rod Fitzgerald.
Into the final quarter of the year, and it's easy for investors, still, to be blindsided by geopolitical uncertainty and worries about low inflation. But how confident is the market right now? Well, with me to discuss this is Luca Paolini of Pictet Asset Management. Luca, welcome. Have you stopped worrying about North Korea and low inflation and things like that? Are you very much confident about the market?
Well, what we have learned in the last few years-- you shouldn't probably worry too much about political/geopolitical risk. We should focus on growth. We should focus on inflation and central banks.
What we know is that global growth is basically close to 4%. It's one of the best rates we have seen since 2009. Consumer confidence close to an all time high, and inflation is low, which, obviously, is very supportive for risk assets. So in that sense, I think the outlook for the next three to six months is very positive for equity investors.
And our first chart shows just how confident the market is and how asset prices are responding to that.
Yeah, well, again, what we can see from the chart is that there is still a strong correlation between global growth, global confidence, and markets. It's not just central banks. If growth is very strong, earnings are going up, and then, obviously, very good for equity investors.
And your second chart is your old-fashioned misery index, which we used to worry about. But just look how low it is these days.
The misery index was very popular in the '70s in the period of stagflation.
Just explain what it is.
It's just the sum of the unemployment rate and inflation, with the idea that if you have low unemployment and low inflation, it's very good for market. And then actually, what you can see is negative correlation. And this also will suggest that even if everybody's worried about valuation in the US-- and valuation is high-- the misery index will suggest that there's still a little bit of upside in terms of valuation-- maybe around 15% or 20% until the end of the cycle. So there is still a little bit of upside, definitely, in the US, even on valuation.
OK. And what's helping that, your third chart shows, is zero-bound policy, which, coupled with low unemployment, also makes it a good case for investing.
Well, what you can see in the chart is, historically, again, we have higher rates when inflation tends to fall. There is a negative correlation. Now we are seeing the unemployment rate in the developed markets at an all time low. But you still have exceptionally low interest rates.
This could be seen as a positive. And it is for the next three to six months, because we don't expect a big change in monetary policy. But it's also a risk in the medium term. Because it's difficult to expect central banks to remain dovish forever, when you have very solid growth, and growth above potential.
Ye, I was going to ask-- just finally, Luca-- investors have been very short-term for an awful long time. Is it time to start thinking more medium term about your investment opportunities?
Well, yes and no. It's always, I think, one of the problems that we have in this industry, to be focused too much in the short term. We're missing the big picture. And the big picture is still the business cycle. As long as the business cycle is doing well, equities will do well.
The question mark, though, is how long this business cycle will continue. We start to see the first indication that we are approaching the end of the cycle. In our view, we still have one or two years. So maybe it's a bit too late to be too long term. But being too short-term, think, is never the solution.
Luca Paolini, thank you very much.