From September 10-12, a select group of our investment managers, economists and strategists congregated in London for our annual Global Investment Forum (GIF). The GIF is designed to tune out the day-to-day market noise and focus on key market drivers over the medium term.
The end of globalization?
Globalization has fueled the strong growth in the world economy over the last quarter-century. But the pendulum now appears to be swinging against it, with voices from both the political left and right rejecting it for being either too capitalist or too centralized. The retreat from global leadership by the U.S. is arguably accelerating the process. As China also turns more introspective in its economic policies, globalization is starting to give way to regionalization. While we do not expect globalization to be reversed, it has stalled and the break-neck economic expansion of the last two decades is unlikely to be repeated.
Life after Brexit
The UK’s departure from the European Union will undoubtedly be a seismic event for the country. While the hit to growth of a no-deal outcome is potentially very serious, we at least see a dynamic UK service sector continuing to reach out successfully around the world. Deeper ramifications of Brexit could be felt in the political arena, with Irish reunification and Scottish independence seemingly moving closer. We could also see UK politics polarizing further, with Labour’s agenda for mass nationalization clouding the outlook for utilities. Political risk and economic uncertainty look set to continue.
Has monetary policy reached its limits?
With interest rates at rock bottom and the impact of financial asset purchasing programs apparently waning, central banks are running out of monetary policy options for tackling the next global economic slowdown. Fiscal policy is gaining increased backing as the next solution, with proponents of ‘Modern Monetary Theory’ advocating the use of quantitative easing to finance government spending. With low and stable inflation giving them more flexibility, central banks are talking up the need for fiscal expansion, and speculation is rising that it could be used to fund green policies.
The challenge of decarbonization
There is no more timely and pertinent topic than climate change and the need to decarbonize the global economy. If the target of zero net carbon emissions is to be met and dangerous global temperature rises avoided, we will need to make fundamental changes to the way we live. The pathway to decarbonization is straightforward in some sectors. In energy generation, for example, renewables are taking an increasing share and are falling in price. Feeding an expanding global population in a carbon-neutral fashion is, however, more problematic. Negative emissions technology offers hope that the carbon budget can be balanced, but the pace of this type of innovation needs to be accelerated.
Auto breakdown in Germany?
Selling massive volumes of high-value cars across the world has been one of the foundations of Germany’s economic strength in recent decades. But as the structural switch to electric gets under way, this highly successful model faces severe challenges. With other key sectors, such as chemicals and plastics, also facing headwinds, Germany’s economic dominance is under threat. We think the impact could be so great that France, with its low reliance on auto exports and recent labor market reforms, could assume the leadership of the Eurozone economy.
Are we closer to a U.S. recession?
Fears of a U.S. recession are widespread. These worries have been fed by the inverted Treasury bond yield curve – a reliable predictor of recessions in the past. Trade tensions increase the risks. Their direct impact may be limited but they have hit business confidence and investment. The U.S. economy has certainly slowed but we do not see recession in the near term. The Federal Reserve has already cut interest rates and has scope to go further. Consumers, secure in their jobs and receiving decent wage increases, are happy to keep spending. With 2020 being an election year, we think President Trump will be keen to secure a vote-winning trade deal with China, thereby removing that drag on sentiment.
Asset allocation
We remain broadly positive on equities given the dovish shift of the main central banks and reasonable performance of corporate earnings (profits). However, we are neutral on government bonds, where the benefit of supportive monetary policy and low inflation is being offset by stretched valuations and ultra-low yields. While rich valuations also weigh on corporate bonds, the emerging debt sovereign bond market looks better set on the back of supportive central bank policy and low global inflation. In currencies, we are negative on the U.S. dollar given the prospect of further easing by the Federal Reserve. We are positive on the euro and the yen on relative valuation considerations.
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