- Despite China’s slowdown, concerns about Greece, & imminence of the US Fed’s first rate hike, global growth should not be completely derailed. But, clearly, these are headwinds, & another reason for central banks to take only baby steps to normalising rates.
- With the gap in 2015 between advanced and emerging economies’ growth rates, at just 2%yoy, the smallest since the dot.com boom of 2000, the pressure to preserve world growth is tilting back from the emerging to advanced economies.
- Our macro outlook is based on four core beliefs. First, not only will US and UK real policy rates stay negative into 2017, but ‘peak’ rates when they come will be much lower than we’re used to, & certainly below the US/UK’s historic averages of about 5%.
- Second, these peak rates will ultimately be delivered by central banks running down their assets via ‘QT’ (quantitative tightening). The BoE wants first to see Bank rate back up around 2%, which will take years. This could be part of a ‘disaster recovery’ for Brexit (risk case), which may need extra QE.
- Third, China may be slowing, but has the wherewithal to soften the landing. Even with just 3% real growth in 2015, China will have generated over two years nominal growth equivalent to the total GDP of Spain. Expecting it to carry on doing more was unrealistic.
- Fourth, despite pockets of vulnerability, a ‘blanket’ emerging market crisis seems unlikely. External debt ratios are generally lower, there are fewer fixed pegs to protect, & they can print money. This makes comparisons with 1994, when most assets were hit hard, look superficial.
- Meanwhile, the ‘baton’ looks like it’s being handed back to the advanced economies to fuel world growth, while China enacts an avalanche of stimulus measures sufficient to arrest the decline and avert market turmoil.
- If it doesn’t, the US Fed’s rate tightening cycle could prove to be one of the shortest yet. Which all suggest 2016 will be more like 2015 than 1994. The ball is admittedly in China’s court - but doing nothing would be a bit like a turkey voting for Christmas...
Turning down the heat: Our approach to managing carbon risk in investment portfolios
Ahead of the curve: Euro-zone - closing the gap