Market commentary tends to revolve around a limited set of topics. We have put together a list of nine frequently asked questions and our answers.
How is the global economy? In pretty good shape. Spring has sprung, according to IMF chief Christine Lagarde, and all regions are growing. The IMF reckons the global economy will grow by 3.5% this year after 3.1% last year.
Much of this pick-up is likely due to stimulus by the Chinese government and the ECB some while ago. However, growth has slowed quite sharply in the US and the UK recently and there are signs that Chinese growth might slow later this year.
And the next recession? No sign of an imminent downturn, in our opinion. But, surprisingly, the IMF thinks there is a 44% chance of recession in Japan over the next four quarters and 30% in the Euro Area and 22% in the US. Even though we do not expect a recession this year or next, there are reasons to be cautious.
Or the next inflation surge? Also unlikely. The feature of this upswing has been slower than normal growth and hence fewer inflation pressures. Even in the US and the UK, which have enjoyed the fastest growth in the G7 and have the least spare capacity, we cannot get unduly worried.
When and by how much will the Fed raise rates? If you believe the FOMC “dots plot”, then there will be two more 25 bps hikes this year and three next year. However, analysis by Absolute Strategy Research suggests the pace could be slower than that. The Fed funds future also implies a slower path of rate increases. We foresee no change in policy on 11th May but a strong chance of a 25 bps raise in June. Beyond that, take each meeting as it comes.
Are central bank balance sheets too big? Yes, this will be a big issue over the next two to three years. Certainly, Janet Yellen and Mario Draghi will face questions at every press conference in the near term until the Fed and the ECB decide on firm policies. Expect a gently, gently approach to a tricky topic.
Should I worry about upcoming European elections? Not this year but maybe next year. Even if the polls are wildly wrong, Theresa May should win a large majority in the UK and Angela Merkel retain the German Chancellorship. Even if she doesn’t, Martin Schulz is the former head of the European Parliament and so more europhile than europhobe.
How will Brexit turn out? We shall never know because we cannot run an experiment in a parallel universe where the UK voted Remain. However, it is fair to say that UK growth may slow a bit over the next couple of years while the benefits will be political and tough to quantify.
What are the big risks? Each month we update our risk register, a judgmental record of the likelihood and potential impact of the key portfolio risks. In the latest version, there are nine with a high potential impact. But four of them – for example, a Theresa May defeat – are low or very low probability. In the near term, we worry about upsets in upcoming German and Italian elections and an ECB taper tantrum. Farther ahead, an EU break-up, global recession and a US-led financial crisis are key concerns.
And where should I put my money? In a typical sterling portfolio, we suggest being slightly under-weight equities and alternatives. We think portfolios will make money over the next six to twelve months. However, investment returns may be lower than normal and there is a fair chance of a setback at some stage. We prefer European and emerging equities to markets elsewhere.
Our investment strategy committee, which consists of seasoned strategists and investment managers, meets regularly to review asset allocation, geographical spread, sector preferences and key global market drivers and our economist produces research and views on global economies which complement this process.
Our quarterly report presents our views on the world economic outlook and equity, fixed income and foreign exchange markets. Please click the link to download.