Former Tory cabinet minister, John Redwood, thinks that developed markets are likely to 'muddle through in the near future. Redwood, who is also chief global strategist at Charles Stanley, made his comments at this week's Inside ETFs Europe conference in London.
Although Redwood is reasonably optimistic about the outlook, he still outlined all the potential problems which might trigger a market correction and/or recession.
The one he's most concerned about is the budget crisis in Italy. The essential problem there is that Italy's populist government wants to increase the budget deficit whilst staying in the euro. The government's policies, such as a basic income, will inevitably take the deficit beyond the eurozone's limit of 0.8%.
It's possible that the EU might then punish Italy for breaching the limit, just as did to Greece, but Redwood thinks the most likely scenario is that the EU won't inflict serious pain on one of its largest members. But he's not ruling it out completely. He's also concerned that both sides might not engage and come up with a deal on the deficit. Further turmoil in Italy could trigger fresh instability in the eurozone banking sector.
Another possible problem for markets is rising interest rates. Recessions are often triggered by rising rates following a bout of inflation. The US Fed has already raised rates several times over the last year and more rises are likely. However, Redwood thinks that the Fed has increased rates at the right pace so far, so he thinks the chances of a global recession triggered by a global monetary policy tightening are relatively low. He also stressed that policymakers around the developed world will be reluctant to raise rates too far when so many governments are relying on cheap borrowing.
China is the third possible roadblock. China will suffer if the Trump trade war gets worse and there's also the issue of Chinese debt. On top of that, we see rising geopolitical tension in the South China Sea.
On the debt issue, Redwood pointed out that most of the Chinese debt is borrowed within China. The government can always resort to the printing press if necessary. As for trade, 'it's not big enough to bring the world economy down' because US-China trade levels are lower than many realise.
Redwood also stressed that economic cycles can go on a long time. A nine-year bull market isn't inevitably going to hit the buffers. Especially if central banks continue to get monetary policy right. What's more, Redwood said that he doesn't see the kind of euphoria in markets he's seen previously at the top of a stock market boom.
Redwood ascribed percentage chances to the three main scenarios for developed markets.
His 'base case' is that developed markets will continue to 'muddle through.' This has a 65% chance.
There's a 25% chance that one of the roadblocks goes badly wrong and triggers the end of this cycle. And there's a 10% chance that we'll see stronger growth than is currently expected. For this, the trade problems would have to be quickly fixed and the Trump boom would have to continue firmly.
Redwood also said that the Nasdaq remains his 'highest conviction position.' He believes that technology firms will continue to disrupt across the economy. And unsurprisingly for a Brexiteer, he's upbeat on prospects for the UK economy and markets.
What to do
Redwood carefully didn't make any recommendations when it came to sectors, individual stocks. But we can still look at which ETFs you could consider if you think Redwood's thoughts may be on the right lines.
If you want to invest in Nasdaq, you could go for the Invesco Nasdaq-100 UCITS ETF (GBP) EQQQ which tracks the hundred biggest stocks on the Nasdaq. This includes big holdings in the likes of Apple, Amazon and Facebook. This is a big ETF with a fund size of $2.7 billion and an annual charge of 0.3%. Be careful though, this ETF is very concentrated in a small number of stocks and, regardless of Redwood's comments, you can make a decent case that US technology companies are over-valued.
If you think that now is a good time to invest in UK stocks, check out our article, Five top UK ETFs for ideas on how to do it.
And finally, if you think that China won't be brought down by a debt crisis, you could consider the Xtrackers MSCI China UCITS ETF (GBP) XCX6 . This ETF tracks the MSCI China index which has around 450 constituents and gives you exposure to most of the offshore Chinese shares, both in Hong Kong and New York. It also includes a small amount of mainland China shares (around 2.5% of the ETF.) That percentage may be increased in future. The largest stocks include Tencent, comprising around 15% and Alibaba, comprising around 12%. The ongoing charge is 0.65% a year.