Jeremy Richardson from the RBC Global Equity team examines divergence within global equity markets.
Highlights:
Global equity markets showing signs of a K-shaped pattern.
Division emerging between high-income households spending freely and more cautious low-income households.
Why investors should aim for a well-balanced portfolio.
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Hello, this is Jeremy Richardson for the RBC Global Equity team here with another update. You might have heard the expression a K-shaped economy, it’s a simple mental construct to try and describe the bifurcation that is happening in the real economy. Where the top end of the K you've got households who enjoy reasonably visible, strong levels of monthly income and actually quite good balance sheets, and they seem to quite content to continue to spend.
We're seeing that in terms of company information and data. So, for example luxury goods sales are picking up and one hears from the airline companies that demand for travel is actually pretty strong still. But at the bottom end of the K, you've also got households who perhaps don't have the same balance sheets and don't have the same monthly income.
So, there's clearly some pressures there that is filtering through into company results. In fact, we just recently had some information from restaurant companies saying that retail sales is still struggling as young income consumers preferring to save money by eating more at home. That K sort of shape, I think also applies to equity markets at the moment, because we are also seeing bifurcation within equity markets where at the top end you've got performance being driven by still a relatively small group of large technology companies who, because of their strong results, are able to sustain the overall level of the headline index.
But at the bottom leg of the K, there's also a large group of left behind businesses who may enjoy very good fundamentals and, you know, good cash flows. And often offer a degree of relative value, but they're not capturing the market's attention or enthusiasm in the same way.
So, what does this mean for investors? Well, you probably think the lesson of the day is to actually try and make sure that one's portfolio remains well balanced. And that probably means exercising good portfolio hygiene, taking profits and some of those businesses which should be doing particularly well at the top end of the K, where that may be appropriate to ensure your portfolio remains in shape. But also, not turning a blind eye to some of those left behind companies with your strong fundamentals, which are offering attractive relative value at the moment.
I hope that's been of interest, and I look forward to catching up with you again soon.