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Our investment and engagement teams reflect on COP26

The investment floor share outlooks for the rest of the year

Silvia Dall'Angelo, Senior Economist, discusses the five dynamics shaping her inflation outlook for 2021.

Monetary policy – which did the heavy lifting in the aftermath of the global financial crisis – has reached its limits.

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Emerging markets contended with a challenging backdrop in 2018, amid less accommodative global financial conditions, slowing economic growth in China and fraught US-China trade relations.

The trade tariffs – and corresponding retaliatory measures – implemented are so far limited. In total, the value of affected trade now amounts to about $150bn globally, or 0.8% of overall world exports. However, adding up all the measures currently under discussion and assuming impacted countries retaliate commensurately, the amount of targeted trade could quickly rise to more than $1tn, or 6% of global exports. In her latest Ahead of the Curve, Silvia Dall’Angelo, Senior Economist at Hermes Investment Management, argues an escalation of protectionist measures evolving into a trade war could represent the biggest challenge to the world economy.

Despite the eurozone’s economic recovery, the European Central Bank’s (ECB) overall policy stance has remained accommodative. However, as economic expansion continues, a review of monetary policy tools within the bank’s current framework is required argues Silvia Dall’Angelo, Senior Economist at Hermes Investment Management. In her latest Ahead of the Curve, she assesses the factors influencing the uncertain path to monetary normalisation and discusses how policy may be reshaped. QE & the law of diminishing returns Our analysis suggests QE has had a significant impact on sovereign bond yields, with a reduction of between 70bps to 160bps across jurisdictions. The ECB has reached similar conclusions, indicating unconventional monetary policy measures have compressed long-term yields by about 100bps. In addition, the bank estimates that monetary policy measures introduced between mid-2014 and October 2017 will boost growth and inflation by about 1.9 percentage points between 2016 and 2020. While the bond-buying programme has been effective, cost-benefit considerations suggest it is now an appropriate time to prepare for an exit from QE. Today, the marginal benefit of QE is modest, while its costs, in terms of distortions in financial markets and distributional effects, are high.

In the latest Ahead of the Curve, Silvia Dall’Angelo, Senior Economist at Hermes Investment Management, assesses the importance and implications of a flattening yield curve in the US. The US treasury yield curve is a measure economists keep a close eye on. Historically, the curve has been a reliable indicator of future economic activity. Most notably, every recession since World War II has been trailed by a curve inversion, i.e. instances where the spread between 10-year and 2-year yields turned negative. The curve has flattened in the last twelve months, with the spread between the yields narrowing to just 50bps in January. It is therefore possible that the spread could turn negative at some point this year. As such, it is unsurprising that market observers have become nervous about the possibility of a slowdown. But given the current environment of loose monetary policy, to what extent should we trust the US yield as a harbinger of a recession?

In the latest Ahead of the Curve, Silvia Dall’Angelo, Senior Economist at Hermes Investment Management, analyses the impact of ECB tapering on European markets. At its October meeting, the ECB announced a reduction of the monthly pace of its QE purchasing starting from January next year, officially embarking on the so-called tapering process. The monthly clip of purchases will be halved to €30bn over the first nine months of 2018. This move could mark the closing stage of the ECB QE programme, the so-called APP (Asset Purchase Programme), launched in early 2015.