From Volatility to Opportunity: Investing in a Cooling Economy – Magellan

Fears of a Hard Landing Are Overblown

Recent economic data suggests that fears of a hard landing are likely exaggerated. After our assessment, we maintain that a soft landing remains the most likely scenario, with only a 30% probability assigned to a hard landing. Central banks, including the Federal Reserve, have been actively working to curb inflation, which necessitates a cooling of economic growth and some easing in the job market. This is exactly what the latest US data on payrolls, the jobless rate and the ISM factory gauge indicate.

Importantly, these data points and forward indicators align with a gradual slowdown in growth rather than a collapse in growth. We anticipate that growth will continue to ease, creating an environment that favours quality companies. Our team is closely monitoring the outlook as it unfolds.

 

Potential Risks to Market Stability

Despite our optimistic outlook, there are two primary risks that could drive markets lower. The first risk involves the Federal Reserve potentially mishandling its policy changes. If the Fed fails to soothe markets during periods of volatility or delays unwinding its restrictive policies, it could negatively impact market stability. Although we have a high level of confidence that the Fed will avoid such mistakes, this risk warrants close attention.

 

The second risk is the occurrence of a Black Swan event—unpredictable and rare events. While the timing of such events is inherently difficult to predict, we can identify some likely candidates. These include challenges in commercial property markets, instability within the financial system, concerns over government debt levels, or a shock to Middle Eastern energy supplies. These potential Black Swan events were highlighted during the National Roadshow and remain on our radar.

 

Volatility provides Opportunities

Market volatility, while often unsettling, can also present significant opportunities. Our analysis suggests that the recent large swings in equity markets were driven more by shifts in investor sentiment than a change in fundamental earnings outlook. We estimate that improved sentiment among equity investors has been a major driver of rising markets in the past couple of years, with sentiment reaching near-record levels.

 

The weakness in markets in early August, driven by declining sentiment, offered investors a chance to purchase quality companies at attractive prices.

 

Performance of the Magellan Global Fund

During this period of market turbulence, the Magellan Global Fund demonstrated resilience. Since the peak in global share markets in mid-July, the Global Fund experienced a smaller decline compared to the broader market. This trend was particularly evident when market volatility was at its highest.

The fund’s performance underscores the importance of a disciplined investment approach, focusing on quality, detailed research analysis and long-term growth potential.

While the economic landscape is fraught with uncertainties, our analysis suggests that a soft landing remains the most probable outcome. The risks posed by potential Fed missteps and Black Swan events are real but manageable with careful monitoring. Market volatility, though challenging, may also provide opportunities for investors by acquiring quality assets at favourable prices.

 

For more information on Magellan’s range of funds and to view their performance, please visit our fund page.

For any further questions please contact your local Magellan representative.

 

Important Information: Units in the fund referred to herein are issued by Magellan Asset Management Limited ABN 31 120 593 946, AFS Licence No. 304 301 (‘Magellan’). This material is issued by Magellan and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to the relevant Magellan financial product may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.

 

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