There are rational reasons for optimism about the economy and markets, Gardiner said, speaking at a recent media event in Hong Kong.
“I wouldn’t go so far as to say it’s a goldilocks cycle but it is not bad,” he said. “Global earnings expectations are rising, there is low inflation and relatively little interest rate risk. A return to volatility is a return to normality, which is not as strange and troubling as it may seem.
“It is difficult to retain a sense of perspective because we are connected via social media. We know about the bad things because we hear about it instantly on social media. But these are the most peaceful times planet has ever known and it is necessary to keep things in perspective.”
Balance above all
His overall message to investors was to keep a balanced view, including the positive with the negative.
“Since mid-2016, US corporate earnings are up 50%. People say earnings are driven by stock buybacks with no top-line growth. That’s not true, just look at the data – buybacks are a small percentage. Profits are not just growing a bit, but growing strongly.”
The average business expansion cycle, trough to peak, is four years, he said. “We’re moving into the ninth year, but the longest cycle has been 10 years in 2001. I would not be surprised if this cycle matched that or went longer. Business cycles can go on and on, we don’t know the upper limit.
“There are very few imbalances in this cycle. The US private sector is not borrowing recklessly. If there was reckless excess behaviour, we expect it to be translated into inflation and that has not happened.”
Concerns about a trade war between the US and China may develop into a positive outcome, pushing China to open its economy and financial industry faster than it has been.
“Of the big economies in the world, the most protected to begin with is China. It’s not the US. The playing field is tilted against countries like US and in favour of countries like China.
“When all the shouting settles down, it’s possible we may come out of this with a net liberalisation of the global economy rather than a contraction. People have been focusing on the extreme side of possibilities forgetting there is a positive side.”
He also downplayed geopolitical concerns. Although there are “idiosyncratic characters on the stage, markets and politics are only loosely connected”.
Gardiner’s general advice is to stay invested in a globally-diversified, stock-tilted portfolio.
“If you already have a long-term portfolio sensibly diversified across regions and tilted toward equities – which is where expected inflation-beating returns will come from – don’t be tempted to do something, just stand there.”
Rothschilds Wealth Management is recommending equities over fixed income allocation and has only two underweights in equities – the UK and utilities. “We are also cautious on bond-like assets such as utilities, real estate and telecom,” Gardiner said.
Overweights are Japan and emerging Asia. By sector they are consumer discretionary, healthcare, technology and financials.
The single biggest risk to his investment thesis in the next 12 months is the interest rate cycle, he said.
“We do worry about central banks thinking they can fine tune inflation. They did save the financial world in 2008. I’ve seen indications that they now they think their responsibility has to be more than a crash barrier. I’m worried that monetary policy becomes too stimulatory for too long.”
The only asset he sees displaying bubble-like tendencies is cryptocurrencies.
“Adding cyptocurrencies to an investment portfolio is like adding a bet on the Grand National [horse race]. It has nothing to do with reasoned judgment.”
Rothschilds WM suggested allocation – April 2018