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
The dominant global theme in June has been the increase in rhetoric from central banks – other than the US Federal Reserve – suggesting the day is nearing when emergency policy stimulus will need to be unwound. Global bond yields rose as a result, while the US dollar weakened. ECB President Mario Draghi suggested that deflationary forces have been replaced by reflationary ones. The Bank of England and the Bank of Canada also hinted at policy tightening. Monetary policy normalisation across the world is a healthy development, as recent economic data suggest “emergency” policy settings are clearly no longer needed. The Bank of International Settlements said policymakers should take advantage of the improving economic outlook and its surprisingly negligible effect on inflation to accelerate the unwinding of quantitative easing programs and record low interest rates.
Global growth expectations are on the rise and there may be room for more upside surprises. Reflation is becoming synchronised, with non-US economies contributing as much as the US to growth expectations. This marks a reversal from 2016, when the US was the locomotive. The global economic recovery is broadening and there is room for growth forecasts to ratchet higher as reflation gains traction. While some of the enthusiasm over Mr Trump’s policies might have waned, real hard data is likely to accelerate. The five structural headwinds to global growth over the past four years are diminishing – fiscal tightening, the euro crisis, bank deleveraging, the decline in BRIC growth and the collapse in commodity prices, and US and euro area GDP growth may accelerate. The three locomotives of global growth; US, China and Europe, are for the first time since the financial crisis, all contributing to global economic growth. Reflation is the act of stimulating the economy by increasing the money supply or by reducing taxes.