Is Winter Coming?

In the last Weekly Market Update, it was stated that there is good reason to remain moderately optimistic on global equity markets. While this remains true, investors are preparing for a short “winter” period as markets grapple with the risks of the US election, Brexit turbulence and COVID-19 developments.

For those focusing on the global industrial production cycle, however, “winter” has a very different meaning altogether.
Over the last 40 years, global industrial production (IP) trend growth has been 2.7% per year. According to Jonathan Wilmot, “winter” is the period of time when global IP is both growing below trend and falling. In June and July, global IP grew at 5.5% and 3.3% respectively, i.e. well above the 2.7% trend. However, as per Wilmot’s analysis, global IP is likely to only grow by 0.5% per annum in the months of October, November and December. This would fall under his definition of “winter”, namely below-trend growth and falling.

What does this mean for markets?

During periods of below-trend and decelerating global IP growth, equities tend to underperform bonds, and riskier equities, such as emerging market equities; perform particularly badly. Therefore, one might expect markets to become choppier should Wilmot’s forecasts turn out to be correct.

Spring follows winter

However, it is also reasonable to expect this “winter” period to be short-lived and subsequently be followed by “spring”. The election will have passed, the Brexit outcome will be known, and there might be a vaccine (at least for emergency use). According to Wilmot, “spring” is the period of time when global IP is growing below trend but rising.

Such periods have historically been associated with periods of outperformance for risk assets. Indeed, equities have returned 22% of an annualised basis in “spring” periods, which provides a good foundation for investors to maintain a meaningful allocation to global equities.