Global economic growth is firm but set to moderate just as a number of factors, including the prospect of rising trade barriers, begin to underpin inflation outlook. In the context of our constructive, but defensively-titled strategy, we make several adjustments to further align our portfolios with our macro outlook...
We have moderated our macro outlook somewhat, owing to the impact of higher US interest rates and the typical late-cycle inflationary factors. The remarkable rebound that followed on the heels of the commodity crash of 2014/2015 was always expected to start tapering out. In addition, however, Washington's strong-armed trade policies have hardened recently, risking a backlash from rivals and allies alike. This creates new uncertainties that can trigger volatility and undermine a possible rebound in momentum in equity markets. In economic terms, rising trade barriers tend to lead to higher prices.
In Europe, the recent and rather laborious formation of a new Italian government with a mandate to curb immigration and boost social spending could revive political tensions within the eurozone, sap confidence in Italy's fiscal health and its reform capacity, and hence weigh on markets as well.
In the emerging markets (EM), rising US interest rates, a strong US dollar (USD), and the associated potential scarcity of USD liquidity, combined with the rise in energy prices, have led to rather indiscriminate selloffs recently. A wide range of markets with distinct, country-specific political and economic issues were impacted, ranging from Argentina to Turkey and Malaysia, forcing some central banks to hike interest rates to stem the capital flight. Although a lasting fallout should ultimately be limited only to the most fragile economies, i.e. those with their fiscal and current account balances in the red and weak institutions, general volatility may persist going forward, as several elections are due in the coming months (e.g. in Turkey, Brazil, Mexico).
To be clear, our baseline scenario remains quite positive, with most major economies continuing to expand near or above potential - as is typical this late in the cycle.
Some major markets, including the US, could very well deliver more upside surprises in the coming months. In most EM, which are in an earlier stage of their cyclical upswing, the underlying fundamentals also remain benign, and most countries are more capable of managing their policy challenges better than during previous US monetary tightening phases. Nevertheless, the business surveys have begun to point to a slowing economic growth going forward.
Note: The next edition of the LGT Beacon is scheduled for mid July 2018.