Quarterly Investment Strategy
MARKET OUTLOOK: LOW, SLOW AND STABLE
What a start to the year! Financial markets experienced their worst 1st quarter in a long time amid fears of a global economic downturn, attributable to any or all of the following: a hard landing in China, the oil price collapse, an industry-led US recession or a breakdown of the European banking sector. At this point, however, such speculations are just that – speculations.
The past few weeks have actually seen a stabilisation of economic momentum across the world. Admittedly GDP (Gross Domestic Product) growth in the major economies is modest, and should stay so throughout the year due to corporate caution, but there are no signs of a collapse in activity. Western consumers, especially American, remain in solid shape. Their resiliency, along with still strong services activity, suggests that the global economy has underlying strength.
Household consumption in advanced economies posted faster growth in 2015 than in any other year since the global financial crisis. Labour markets conditions are improving, household debt burdens have fallen and consumer confidence is high. Further, while commercial credit is showing – modest – signs of weakening, the growth in loans to households remains robust.
Also helping to dissipate market fears have been two reflationary factors: the recovery in the commodity complex, in sync with a peak in the US dollar, together with yet another round of monetary policy support.
On the commodity front, as we gain some clarity on the trough in oil prices, hard currency inflows to emerging economies should increase, helping to stabilise – perhaps even reverse – the drain on their foreign exchange reserves (which have fallen by as much as 20% in Nigeria over the past year, and an even mightier 35% in Venezuela). In turn this should dampen expectations of currency depreciation, driving down bond spreads. In the US, the oil price recovery should alleviate fears of a manufacturing sector contraction, without adversely impacting consumers (oil is still at a relatively low level relative to its 10-year average).
On the monetary policy front, easing by the People’s Bank of China (PBoC) was followed by European Central Bank (ECB) innovative action, as well as signs of greater tolerance towards inflation at the Federal Reserve (Fed). With broad money aggregates in the major economies all growing at a relatively strong 7-8% rate, there certainly appears to be no deficiency of liquidity in the world economy.
Going forward, we will continue to monitor our “dashboard” of economic fears in order to assess the state of the world economy and the probability of a prolonged downturn. Beyond the afore-mentioned usual suspects (China, oil, US industrial activity and European banks), we will be keeping a close watch on the Brexit referendum – more details in the European and asset allocation sections. For now, though, we stand behind our “low but stable” growth scenario, confident that none of these economic risks are materialising but also recognising that, as always, unpredictable (geo)political events could disturb the relative calm.
Note: Unless otherwise stated, all data mentioned in this publication is based on the following sources: Datastream, Bloomberg, Lombard Odier calculation.
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