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What has changed in the global economy?

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Graham Bishop

Investment Director
10 min read

On the surface, observers could be forgiven for believing that little has changed in the global economy. Headline economic data continues to send the same signals (of a growing, but slowing, global economy), and many of the same geopolitical issues which dogged investment markets in 2018 remain in situ.

But a glance beneath the surface points to some subtly shifting signals.

US-China trade tensions are becoming a permanent threat

Over the past 18 months, significant escalations in the trade dispute between the US and China have coincided with market corrections (rapid changes in asset prices) on three separate occasions. At present, signals are mixed once more. Following some signs of diplomacy, President Trump appeared to be deliberately escalating trading tensions with China, threatening to apply tariffs to more Chinese goods on 1 September. Beyond this, the only tariff route left would be to increase existing charges. This deadline now appears to have been pushed back to December for some goods, but tensions remain high. Of course, Trump’s latest threats could have been a mere negotiating tactic, but we have learned by now that we must never make assumptions when it comes to the president’s posturing.

Indeed, ploy or otherwise, China chose to retaliate to Trump’s most recent aggression. Authorities put a brake on imports of US agricultural goods and appeared to be manipulating the Chinese currency – weakening the yuan to secure a competitive advantage on the global stage. While there was no way to prove conclusively that China had deliberately manipulated the yuan’s value versus the dollar, the timing was suspicious enough to irk Trump. The US has also suspended Huawei licences as part of an ongoing targeting of China’s flagship tech giant.

 

Past performance is not a reliable indicator of future results.

A further ratcheting up of tensions is not in anyone’s interests (including the US economy), but after over a year of frequent escalations in this dispute, we maintain that it would be unwise to assume that Trump is bluffing about December’s tariffs. Given the damage trade wars have caused to the global economic outlook and broader investment markets, we believe it is increasingly prudent to assume that Trump could well deliver on any threats.

Will central bank action be quick or concerted enough?

Trump may well be able to change the world for better or worse with a single line on Twitter, but he is not the only one with the power to influence world economies and investment markets: central banks also hold substantial firepower. In order to avoid
serious economic consequences, the world’s major central banks need to ramp up efforts to stimulate global growth.

So far, the leading central banks have made all the right accommodative noises, but have offered little in the way of serious action.

  • In the US, a small interest rate cut in July should have offered encouragement, but – couched in the language of insurance, and with mixed messages about further future action to come – investor enthusiasm is capped.
  • Across the Atlantic, the European Central Bank (ECB) has hinted at fresh action ahead, but with no policy committee meeting in August, any expectations must be put on hold until September.
  • Meanwhile in the UK, the Bank of England has been effectively paralysed by Brexit uncertainty. Despite recently deteriorating economic data (likely the result of global developments plus Brexit-related issues), the Bank can take very little high conviction action without some clarity on the UK’s future position in Europe and, by extension, the wider world.

Past performance is not a reliable indicator of future results.

Investment markets are sending mixed signals, but concern is growing

Set alongside the last three years, economic growth remains weak. We see this as the bottom of another mini fluctuation in the economy, which historically often becomes the start of an economic upswing (via central bank support). Today, though, with central bank interest rate cuts but no quantitative easing, limited government spending action in China, and trade concerns on the rise again, we are more wary. And as global growth approaches a possible ‘stall speed’ of 2% (a point last reached in 2015-16 when the world stood on the brink of recession), this should give investors pause for thought.

Past performance is not a reliable indicator of future results.

Certainly, high prices in bond and gold markets (typically safer asset types in turbulent market conditions) point to concern among investors. Gold has risen by well over 20% so far this year (as at 9 August), while negative yielding bonds (whereby investors effectively pay for the privilege of lending out their capital) have reached record highs. Within portfolios, our gold and bond positions have performed well. We have been adding to our gold holdings, whilst repositioning our bond holdings to slightly increase our exposure to duration (more sensitive to interest rate changes).

At the same time, relatively sanguine stock markets appear to be singing from a rather different hymn sheet, as has so often been the case in recent history. Stock markets are trading the ‘lower-for-longer’ theme, backing an environment of low interest rates, inflation, bond yields and economic growth. We have previously had sympathy for this notion, and have been cautiously optimistic about some of the catalysts for positive change (e.g. intermittently constructive trade signals and proactive-sounding central bankers), and added to risk levels in portfolios in order to take advantage of potential ongoing buoyancy.

However, despite little change on the surface, risks to the global economy have risen, causing headaches for investors and leading us to bring our stock market exposure back down to ‘neutral’. Amid the swing toward a ‘hard Brexit’ in the UK cabinet, we have also adjusted our UK exposure away from the small- and medium-sized companies whose share prices might have benefited most from a Brexit deal.

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About the author

Graham Bishop

Investment Director

Graham has been responsible for asset allocation since joining Heartwood in 2017. He also manages our Balanced Investment Strategy. Previously, Graham worked at Citi where he was the investment bank’s Global Macro Strategist from 2014 and held responsibility for Citi’s Global Asset Allocation views and Global Macro Strategy trade ideas. Prior to this, he worked as an Equity Strategist at Exane BNP Paribas and the Royal Bank of Scotland. Earlier in his career Graham worked for Cazenove Capital Management as an Economist and Multi Asset Strategist.

Graham studied economics at the University of Exeter and is a CFA charterholder.

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