Market and Economic: Five-Year Outlook

Global Investment Forum

Skyline of The City in London, England at sunrise

Over three days a selection of our investment managers, economists and strategists congregated in London for our annual Global Investment Forum (the Forum).

As well as sharing their own analysis and insights, the team heard from a range of independent experts with sessions covering geographic regions and topical themes like artificial intelligence, Big Data and tensions around international trade.

The Forum is designed to foster an environment of debate – one in which our team can formulate views and perspectives on economic and market prospects which, in turn, can be applied within the portfolios we manage on behalf of our clients. It is designed to tune out the day-to-day market noise and focus on key market drivers over the medium term.

 
 

 

What’s our base scenario?

The world economy is in good shape and we expect stock markets to reflect this. Unemployment is falling at the global level and should continue to do so as companies with strong profits continue creating jobs.

Importantly, inflation is a benign influence, residing in what could be described as ‘Goldilocks’ territory, being neither too high which could require damaging rises in interest rates nor too low to morph into the mortal enemy of economic growth: deflation.
 

Global GDP Growth Forecasts (% year-on-year)
Source: Bloomberg, as of September 2018. The chart displays the evolution of consensus expectations for growth in a particular year. While it illustrates a historical pattern of over-enthusiasm for growth at the start of the year, more recently (2017 and 2018), this has changed. Analysts have underestimated the growth trajectory for global economies, which has supported the strong performance of risk assets.

 

Risk assets better placed than bonds

The global economic upswing has been long but shallow and inflationary pressures remain subdued. This creates a fertile environment for risk assets.

But while we expect equities to perform reasonably well with corporate earnings continuing to grow, even against the headwind of rising interest rates, we fear that government bonds and corporate credit may be vulnerable as the unprecedented central bank stimulus is wound down.
 
Chart 2: Number of OECD Countries with Low Core Inflation
 
Chart 3: OECD Policy Rate Changes
 

Global tensions on the rise

While our overall economic view remains upbeat, we concede that there are clouds on the horizon. The U.S. Federal Reserve (Fed) is currently raising interest rates, as are other central banks. We are also witnessing an escalating trade war between the U.S. and China, which is straining relations between the world’s two most powerful nations. Elsewhere on the geopolitical stage, we look on with unease as Brexit and a surge of nationalism threaten the established order in Europe.

Opportunity as growth diverges

A feature of the next five years is likely to be the end of the recent ‘synchronized growth’ phase of the global economy and a return to more uncorrelated growth rates. This can be expected to translate into more differentiated performance by asset markets, which will in turn bring more opportunity for informed investors to make attractive returns.

Interesting times lie ahead as the global economy seeks to establish a new equilibrium both in the context of normalized monetary policy and global trading relationships.


 

What’s driving markets?

 


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