Seeking opportunities in a low-growth environment

As international investors are all too aware, the current bear market presents an array of challenges, and questions.

How long are we going to be in this low-growth environment?

Is this a global phenomenon or can growth markets still be found?

And what actions can you take to firstly, protect your wealth, and secondly, increase it?

A lost decade

Some commentators have suggested that we are currently entering a ‘lost decade’ in Western economies – 10 years of little, if any, real GDP growth.

One of the main reasons is that, post-credit crunch, many developed nations are concentrating their efforts on austerity measures and deficit reduction plans.

According to Citi the last 30 years have seen not only economic growth, but also a build-up of debt in many developed economies. Now that so many of these countries are deleveraging, it’s fair to assume that growth will slow accordingly.

In fact, this link between lower debt and lower growth has been seen before, according to Jonathan Sparks, Senior Research Analyst at Citi International Personal Bank.

He explains: "For many developed economies growth was fuelled by an accumulation of private debt during the decade leading up to the financial crisis. This soon led to a rapid increase in the stock of public debt too and presently we are only at the beginning of a huge deleveraging process, which will most likely keep the rate of growth subdued over the near to medium term"

Add in the fact that China recently lowered its annual growth forecast from 8% to 7.5%, plus the ongoing turmoil in the Eurozone, and it's clear that global economic uncertainty shows little sign of dissolving in the near to medium term.

But what exactly does a lost decade mean for investment markets?

Look east

There are plenty of examples of previous lost decades, such as the UK in the 1970s and the US Great Depression in the 1930s.

But the most recent long-term, low-growth environment has been in Japan, which has experienced not one but two lost decades.

Japanese real GDP grew by just 1.4% a year during the 1990s and only 0.7% over the past 10 years, following its economic boom in the 1980s.

Equity market performance in the country was also poor during this time but that is not always the case, with some nations bucking the trend during a lost decade and seeing strong equity performance.

It is these examples that offer a valuable insight into where to search for investment opportunities.

Green shoots

Citi has done extensive research into the performance of equity markets during so-called lost decades and found that there have been strong stock prices in economies that shared the same three characteristics: a reasonable rate of inflation, cheap starting valuations and earnings per share growth.

Japan is an obvious case study for the effects of deleveraging of economic growth. However, as Sparks goes on to say:

"Extremely high starting valuations and unique demographic circumstances mean Japan is not directly comparable to the current situation, particularly in Europe. Unexpected changes in growth are the key to equity performance and currently the expectations for growth in the developed world are very low indeed."

And there are a number of places that share these three characteristics. For example, the UK and US both currently have high inflation, and a monetary policy that appears likely to sustain this, leaving them well placed for a lost decade, according to Citi analysts.

In addition, some developed nations are currently trading at fairly cheap valuations, with UK equities, for example, among the cheapest in the world.

In this context Citi analysts believe there are potentially good opportunities for UK equities in particular over the coming years, despite the likelihood of below trend GDP growth for some time to come.

In addition, there are also emerging markets to consider, many of which are still expected to deliver strong growth, and the ‘safe havens’ of bonds and commodities can also prove useful in a low-growth environment.

Share our expertise

What is most important is that you don’t make any hasty decisions in the light of the current bear market. A diversified international portfolio is one of the best ways to ensure you grow your wealth over the long-term.

Your Relationship Manager is a fully qualified international investment expert with access to the vast knowledge of the whole of Citi. Get in touch with them today to harness their experience and find investment opportunities in this low-growth environment.