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.
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.
Continue Reading:Monthly Notes - September 2017
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.
Continue Reading:Monthly Notes - August 2017