Newell Palmer: Monthly Economic Notes – April 2018

Monthly Notes - April 18

Economic Overview

January’s burst of equity-market euphoria has given way to fear of a trade war, a more hawkish Fed and the return of volatility. The challenge of late-cycle investing is that equity valuations are stretched, there are worries about the economy overheating and the Fed is taking away the punchbowl.  At the same time, economic growth and earnings are strong. The added complications are that the US federal government has enacted substantial fiscal stimulus at a time when the economy is at full employment, and President Trump is imposing trade sanctions that could escalate into a major trade war.  However, the tit-for-tat tariffs triggered due to US steel and aluminium import tariffs are trivial in size.  All the other tariffs are just proposals, contingent on the US and China being unsuccessful in reaching a negotiated solution.  Hence, so far it has been a phoney trade war between the US and China.

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Monthly-Notes-April-2018

Newell Palmer: Monthly Economic Notes – March 2018

Monthly Notes - March 18

Economic Overview

Ten years since the global financial crisis, investors can find differing signals in the market.  On the one hand, there are signs that economic growth is becoming less dependent on stimulus from central banks.  On the other hand, valuations appear to be stretched for most asset classes.  History suggests that average economic cycles are about 6 years long, but this year will mark the tenth year since the start of the recovery. We must keep in mind that recovery from a banking crisis normally take longer than other forms of financial crisis.  Nevertheless, an economic downturn therefore might be expected in the not too distant future. Central banks are likely to become net sellers of bonds in 2019, as the exceptional post-crisis measures are phased out. Could that mark a turning point in the cycle?  Or will some other event be a catalyst?

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Monthly-Notes-March-2018

Newell Palmer: Monthly Economic Notes – February 2018

Monthly Notes - February 18

Economic Overview

Some investors believe that because the current bull market and economic expansion have gone on for some time, a bear market and a recession will take place soon.  At this stage, there are no signals that usually warn of a coming recession, such as a loss of economic momentum or an inverted yield curve.  A market correction could still happen at any time, because of the overly optimistic sentiment.  Whilst central banks continue to unwind their quantitative easing policies, politics have generally become more favourable to the economy.  Politics has moved from fearing debt and deficits, to using fiscal policy to support growth, as seen in the US where tax cuts have just been legislated.

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Monthly-Notes-February-2018

Newell Palmer: Monthly Economic Notes – January 2018

Monthly Notes - January 18

Economic Overview

For the first time since the global financial crisis, world GDP growth is increasingly strong and synchronous, although it has been supported by loose monetary and fiscal policy. Looking to 2018, we believe that the growth momentum will continue and this would be broadly supportive of growth assets. However, there are risks that will require close watching and they include a sharp and unexpected rise in inflation, the unwinding of quantitative easing by central banks and how economies deal with potentially distorted asset prices as monetary policy is tightened.

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Monthly-Notes-January-2018

Newell Palmer: Monthly Economic Notes – December 2017

Monthly Notes - Header Dec

Economic Overview

The increasing breadth of the global economic expansion suggests the global expansion is sustainable and will last longer, with the US demonstrating the most advanced recovery in the current economic cycle.  This has resulted in inflation picking up in the US but moving sideways at low levels in the Eurozone, supporting monetary policy divergence.  Steady growth is supporting subdued market volatility, and this is supportive of growth assets.  Geopolitical risks have the potential to disrupt markets, with the North Korean missile and nuclear weapons program a major threat to regional stability.  However, an all-out war is a low probability event as the costs are too high on all sides.

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Monthly-Notes-December-2017

Newell Palmer: Monthly Economic Notes – November 2017

 

Economic Overview

With the global synchronised recovery and central banks unwinding the quantitative easing measures, the global economy is now in the best form since the global financial crisis.  Looking beyond the immediate horizon, the next financial crisis could arise from:  (1) Rising inflation.  Central banks have less ammunition to deal with the next crisis as inflation, whilst under control for now, could rise in the coming years.  Inflation is a lagging indicator and there is an 18 month lag time of inflation vs. GDP.  The low global inflation we are seeing now is a result of the soft patch in the US economy in late 2015 and early 2016.  (2) Populism.  More government spending and less money printing should result in inflation and higher bond yields.  (3) Demographics.  The opening of China since the late 1970s unleashed 1 billion of people into the global workforce and this has been deflationary for wage costs.  However, with the effects of the one-child policy now coming through the system, labour is not cheap anymore.  (4) China’s growing debt.  With the ratio of financial debt to GDP at 200%, a crisis ensured in four countries that hit this level over the last 30 years – Japan, Thailand, the US and Spain.  Whilst none of this factors may give rise to a crisis in the immediate future, we need to monitor these indicators.

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Monthly-Notes-November-2017

Newell Palmer: Monthly Economic Notes – October 2017

Monthly Notes - Header Oct

Economic Overview

Worries over geopolitics and the slide in US inflation data are amply offset by the continued and synchronised pick-up in global growth.  Despite the relative maturity of the US business cycle, recession risks remain muted and a combination of global earnings upgrades and loose financial conditions are supportive for shares and other risk assets. Globally, central banks remain in mostly dovish mood; and even with balance sheet normalisation in the US and tapering of quantitative easing in Europe set to start, policy around the world is still loose.  Equity returns in late cycle are typically positive unless financial conditions tighten sharply.  The slow pace of rate normalisation and lack of inflation pressure create a good environment for taking risk.  Any deterioration in data, in particular employment, business confidence and consumer lending metrics, may trigger a review of holding risk assets.

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Monthly-Notes-Oct-2017

Newell Palmer: Monthly Economic Notes – September 2017

Monthly Notes - Header Sept

Economic Overview

For the first time in a decade, the world’s major economies are growing in sync. All 45 countries tracked by the Organisation for Economic Cooperation and Development are on track to grow this year, and 33 of them are poised to accelerate from a year ago, according to the OECD. All the major developed world central banks – the US Federal Reserve, the European Central Bank and the Bank of Japan – have been buying government bonds as part of their quantitative easing (QE) programs. However, these programs are probably past their use-by date, with central banks now acknowledging their shortcomings. For example, the ECB asset purchases may have become counterproductive. By raising consumer savings, reducing income growth, lifting asset prices and harming bank profitability, QE in Europe has led to less lending to businesses. The question is whether central banks can unwind their QE programs if inflation is falling or low and stable. The coming months and years will see the tussle between cyclical inflation, which is driven by oil prices and the ongoing structural deflation headwinds of technology and globalisation.

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Monthly Notes - September 2017

 

Newell Palmer: Monthly Economic Notes – August 2017

Monthly Notes - Header

Economic Overview

Over the medium to long term, geopolitics and domestic politics are not the source of market risk.  To-date, investors would have been best served to ignore (i) the Trump circus, (ii) threats of a US trade war, as global trade has risen since the US election, (iii) the political calendar in Europe, (iv) political disturbances in Turkey and Brazil, and (v) ongoing uncertainty in North Korea, Syria and Iran.  Most geopolitical events were overshadowed by the business cycle within weeks or months.  Instead investors would be better served by focussing on issues that affect growth, profits and central bank policy.  Currently, the data shows the world economy is growing, corporate profits are increasing in the US and central banks still have accommodative policies.

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Monthly Notes - August 2017