Global growth has continued to decelerate from its peak in late 2017 and is likely to slow further. For the time being, this slowdown remains most pronounced in the industrial economy, and in trade-exposed sectors and countries.
During similar periods of industrial weakness in 2012 and 2015–2016, global growth was sustained by the service and consumer economies. However, two factors raise concerns that this time may be different. First, uncertainty over US trade policy could lead businesses and households to pull back on spending. Second, Chinese policymakers appear to be willing to tolerate slower growth, so as to contain financial risk.
As of 17 October 2019
Median and percentiles calculated based on month-end values. The figures above represent expected returns. Expected returns do not represent a promise or guarantee of future results and are subject to change.
Source: FactSet
Implications for Investors
For investors, year-to-date gains have been impressive despite the challenging macro backdrop, leaving equity markets near all-time highs and sovereign bond yields at levels that historically would signal recession. However, while we believe recession risk has increased, it is not our base case.
Rather, we believe diverging equity markets and bond yields can be explained by the rapid shift in the monetary policy since last year. The Fed in particular has made clear that it will act as necessary to sustain growth and is unconcerned by inflation. Bond yields reflect dovish expectations for rates, and equity market valuations look reasonable relative to very low interest rates—well below 2018 peaks, and most elevated in the US, where prospects are most resilient (see Exhibit).
Looking ahead, we expect lower returns from risk assets, with a higher proportion coming from security selection. We also see potential for periodic volatility, given policy risks, and believe equity investors should upgrade portfolios, targeting companies with high sustainable returns on capital. In fixed income, we believe long duration, developed markets sovereign debt and risky corporate debt remain unattractive and favor shorter duration bonds.
The preceding is an excerpt our Global Economic Backdrop. Read the full paper.
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Information and opinions are as of 25 October 2019.
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