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  • Neil Williams
    In his latest Quarterly Economic Outlook, Neil Williams, Senior Economic Adviser to Hermes Investment Management, argues that the recent market moves are a useful reality check, but believes that markets may be fearing the wrong 'bear'. The recent weakness of equity markets looks driven more by the drift-up in bond yields, US tightening expectations, and what they may mean for future growth, rather than any downturn in the economic data. A testament to recovering, rather than relapsing, economies. The challenge now for markets questioning the ‘Goldilocks’ scenario of ever faster growth and ultra-low rates is to identify which of the ‘bear’ risks to fear. Declines from peaks to troughs in equity markets are traditionally associated with macro shocks, and/or a toxic policy-mix. However, with policy rates still close to the floor, QE close at hand, and little effort on fiscal-deficit cuts, policy can hardly be accused of being toxic. Two feasible triggers could be an extension of the bond-yield rise since the US Fed started its ‘belt and braces’ tightening, and a slower China, but, these should be contained. Furthermore, central banks’ skin in the game suggests they cannot afford to take us off guard. This, more than in other growth recoveries, should limit the rise in bond yields.
  • Neil Williams
    In his latest quarterly Economic Outlook, Neil Williams, Group Chief Economist at Hermes Investment Management, sets out his five core macro beliefs for 2018. He argues that, in the Lunar Year of the Dog, the ‘bark’ of global central bankers may end up being far worse than their ‘bite’. If central banks want their powder back, the Fed’s dual mandate may make sense While 2017 was (like 2016) dominated by geopolitical risk (North Korea, alleged US/Russia links, European populism), none of that was allowed to seep into financial markets. Lubricated by cheap money, a $15trn sink of QE, and the prospect of US tax cuts, reflation trades have raised the ‘cost’ to investors of missing out, even if they lack conviction. The frustration for central banks is that recoveries since 2009 have been mainly output driven. Unemployment is a reducing drag. Yet, with output gaps slow to close and wage pressure capped, these recoveries are failing to generate enough inflation to trigger central banks’ usual reaction functions.
  • Neil Williams
    Neil Williams, Group Chief Economist at Hermes Investment Management, sets out his reaction to today’s autumn Budget: With splits in the Party, Brexit looming, and disappointing UK productivity growth, two things from today’s Budget were inevitable: that it was going to be more political than economic; and that lower growth assumptions would involve higher borrowing ratios further out. With Brexit yet to be financed, Mr Hammond was today never going to show other EU governments watching unbridled fiscal largesse. Through lower growth assumptions (a cumulative 2.2 percentage points), he has effectively had to loosen the fiscal reins again relative to plan, and, depending on how Brexit plays out, may have to kick further down the road the goal he set out last spring to return the deficit to surplus “...sometime in the next Parliament” scheduled for 2022/23. His predecessor, Mr Osborne, had wanted that surplus for three years earlier.
  • Neil Williams
    In his latest quarterly Economic Outlook, Neil Williams, Group Chief Economist at Hermes Investment Management, points out that ten years after the first glimpse of the financial crisis, and major economies have finally recouped their GDP (Chart 1, below). Even Japan, whose deflationary crisis originated two decades earlier and Italy, hamstrung by the euro, are back to ‘square one’. Arguably, most of the macro effects from the crisis were not registered till 2008, which then triggered a round of monetary stimulus – conventional and unorthodox – unparalleled since the 1930s.
  • 07/08/2017
    Equities
    Neil Williams
    In his latest Ahead of the curve, Neil Williams, Group Chief Economist at Hermes Investment Management, sets out the implications of the US Fed becoming the first central bank to suggest it’s worrying about our addiction to QE. By starting to wind down its $4.5trn stock of assets accumulated by QE, it’s about to become the test case for how to push both levers: gradual interest-rate hikes and balance-sheet reduction.
  • Neil Williams
    After 12 months in the departure lounge, our Brexit negotiations have started. The Brexit process was always going to be complicated, but the hung parliament, the need to maintain an amorphous government with the DUP, and possibility of cross-party negotiations form an extra ‘speed bump’ on a journey that could take way longer than the two years hoped for by Article 50, according to Group Chief Economist, Neil Williams. An early UK concession on deferring the trade talks - core to a meaningful deal - until migration, the Irish border, and EU contributions are addressed, looks to be a sign of things to come. Mr Hammond’s preferred ‘slope’ could end up being a path back close to square one… Mr Hammond’s more conciliatory tone is welcomed, but is inevitably clouded early on by ‘cherry picking’. This suggests, at least initially, that UK officials will chase their preferred free-trade goals (which we suspect is access to, without full membership of, the Single Market and/or Customs Union), and try to shun elements (uncontrolled migration and heavy regulation) deemed undesirable.
  • Neil Williams
    This hike to 1¼% had been well flagged, and should pretty much be baked into asset prices. However, it reminds us that the Fed remains the test case for whether central banks can ever ‘normalise’ rates. We expect it to try, but fail – hiking the funds target just once or maybe twice more in future forecast-round months. With the lagged effects of previous hikes yet to come through – it takes an average 18 months before rate hikes affect consumer spending in full – delayed tax cuts, potential protectionism and cold winds elsewhere, this should mean a ‘peak’ rate under 2% – way lower than the historic average of 5%. Thus, we may be facing another two years of negative real policy rates in the US and UK.
  • Neil Williams
    As the world wakes up to the new reality of extremely slow growth, there seems little doubt the returns investors became accustomed to during the ‘Great Moderation’ are a thing of the past, according to Saker Nusseibeh, Chief Executive of Hermes Investment Management. We believe investors will need to adjust expectations downwards across almost all asset classes in the future, with real returns of 4-5% not unimaginable. Real yields on government debt may struggle to exceed 1-2% at the same time. While investors can receive a premium for corporate instruments, these are likely to experience rising default levels.
  • Neil Williams
    In his May issue of Ahead of the Curve, Neil Williams, Group Chief Economist at Hermes Investment Management, discusses his view that while markets are still taking a ‘glass-half-full view’ of the world, protectionism is the new risk emerging. This he argues, suggests we face a year of two halves – where stimulus-euphoria gradually gives way to stagflation concern. Helpfully, though, the trade-off is that central bank policy rates stay lower than many expect. Amid this, the US Federal Reserve remains the test case for whether central banks can ever ‘normalise’ policy interest rates. We expect it to try, but fail – peaking out at a far lower policy rate (1¼-1½%) than in past US recoveries.
  • Neil Williams
    In his latest Ahead of the Curve monthly, Neil Williams, Group Chief Economist at Hermes Investment Management, believes Europe’s contagion this year is more likely to be political than financial. But, with the euro’s economic solution set to take years, and the monetary engine overloaded, it’s time to also crank up the fiscal side. Opening the EU trapdoor at the worst time... The avoidance of an extreme election outcome in The Netherlands is reassuring markets. But, tensions with Turkey have thrown up a new risk – where one country’s referendum spills over into another’s election. As for the UK, we could be inflaming the situation by opening the EU ‘trapdoor’ at such a politically sensitive time. Tackling the cause of the euro’s underlying problems without stoking further social tension needs more than monetary expansion. So, to test whether the macro strains in the periphery are still holding back the core members, we update our ‘Misery Indices’ (MIs).
  • Neil Williams
    Neil Williams, Group Chief Economist at Hermes Investment Management, sets out his reaction to today’s Spring Budget: Having set out his stall in November and still awaiting the main event – our Brexit negotiations - the chancellor’s fiscal tweaks today were never going to raise too many eyebrows. Sterling’s fall since the Brexit vote has so far cushioned the economic blow, allowing him a sunnier growth outlook for this year, and more optimistic tax-take.
  • 06/02/2017
    Equities
    Neil Williams
    After Theresa May’s explanation of the Brexit process and The Supreme Court ruling, the UK’s intended departure date and destination look clearer. But, in his latest Ahead of the Curve monthly, Neil Williams, Group Chief Economist at Hermes Investment Management, believes the largest uncertainty now is the length of the journey ahead. Our negotiations, he argues, could stretch well beyond the two years assumed by Article 50.