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Global Markets Overview – August 2019

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August 30, 2019

In August’s edition of the Global Markets Overview, we revisit our outlook in light of changes in the central bank policy.

In this month’s Global Markets Overview:

  • Following the pivot by central banks toward more accommodative financial conditions, and the associated and significant fall in bond yields and borrowing costs, we have made some revisions to our global outlook.
  • From a midterm view, we are still expecting the world’s two largest economies — the U.S. and China — to experience recession at some point in the next five years.
  • We have made some revisions to our shorter-term outlook for economic conditions in individual countries.
    • First, we continue to forecast that the Eurozone, U.K. and Japan will have the highest risk of recession in the next two years. This is because they are most reliant on foreign demand and the most policy dependent or constrained.
    • Second, for the U.S., we now think that a “soft landing,” (i.e., a period of trend-like or moderately below trend growth), is most likely over the next two years. This is because the fall in U.S. bond yields is stimulative and likely to stabilize the current slowdown in U.S. economic growth.

Monthly overview

  • US and China trade tensions have reescalated. US President Trump announced that he would impose 10% tariffs on the remaining $325bn of Chinese imports into the US. This had a knock-on impact in currency markets, with the Chinese renminbi weakening to trade at an FX rate of above 7.0 versus the USD. This FX price action also caused large moves in the currencies of economies that are closely linked to China via trade.
    • We think the direct economic impact of this trade development for US and China GDP is small – a negative impact of around -0.1% to -0.2% over two years.
  • At the end of July, the US Federal Reserve cut interest rates for the first time in more than a decade, to a range of 2%-2.25%. Chairman Jay Powell cited rising trade tensions and linked to this to cooling global demand and weakness in the business sector. We note that the Chairman’s forward guidance is becoming increasingly accommodative, signalling the Fed’s readiness to provide more monetary support as growth slows. We continue to track the economic data and Federal Reserve commentary to determine the likelihood of further rate cuts.
  • Economic data for Q2 showed negative growth in Germany and the UK, increasing the probability of sustained easier financial conditions, e.g., low bond yields, in both economies. We see potential for Germany to loosen its fiscal strings to support the economy, however, we note possible political opposition to these measures. With regards to the UK, Brexit
    uncertainty continues to weigh on business confidence and investment.

Our Five-Year Outlook

In January, we published our Five-Year Outlook. A summary of this is provided below:

  • First, we expect a material slowdown in growth in most of the major economies in 2019, with downside risks rising as we move into 2020.
  • The main driver of weaker conditions is the gradual tightening of financial conditions, as the major central banks have raised interest rates and/or withdrawn money from the financial system.
  • We believe that a recession in one or more of the major economic regions is likely over the next three years – a more cautious view than in 2018.
  • Second, relative to our medium-term outlook, we think valuations for growth-related assets are still high and expect low returns on average over five years, putting pressure on savers’ wider financial positions.
  • Third, achieving investment return targets – and hence meeting savers’ expectations – is going to be difficult in this environment in our view, even over longer time periods.

Five portfolio priorities for a surprise-free 2019/2020

  • Diversify
  • Reduce unrewarded risks
  • Macro & dynamism
  • Innovate through alpha
  • Innovate to find diversity, e.g., China now offers a new and diversifying set of assets for investors
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