Synchronised global growth in all asset classes in 2017 has given way to volatility and growth divergence in 2018, leaving analysts to question if this is a time of global economic expansion or slowdown.
Chicago-based William Blair global strategist partner Olga Bitel said economic indicators suggest the world is in expansion phase but more data would settle this over the next few months.
“Systematically, there’s nothing to suggest that we’re living beyond our means, or that it’s a credit-driven expansion or consumers are not playing their part in the cycle,” Bitel told the Conexus Financial Fiduciary Investors Symposium 2018 in the Blue Mountains, NSW in May. “Market pricing suggests that participants believe we are in an expansion.”
Equities delivered excellent double-digit performance in 2017, led by emerging markets; commodities gold and oil did “quite well” as did high yield, and sovereign and investment-grade bonds, she said.
“Basically, everything did really well last year,” Bitel said. “A lot of returns were synchronised and a lot of talk was of correlations breaking down. All the asset classes moved together.
“Fast forward to 2018 and the picture is materially different. We don’t have nearly the same outperformance as last year, asset classes are no longer synchronised. We have large portions of fixed income space in negative territory and equities are pretty underwhelming. Naturally the question is, ‘What’s going on, are we on the cusp of a slowdown?’ ”
Purchasing Managers’ Indices (PMIs) showed synchronised global growth of about 4 per cent – indicating a recovery – had not been seen since 2003, she said.
“In economic recovery, all asset classes are quite profitable and that’s exactly what we observed last year. In an expansion, things look a little bit different, for reasons that have nothing to do with current US administration,” Bitel said. “A lot of performance in an expansion is driven by good economic fundamental volatility.
“When you roll over from recovery into expansion, the second driver of growth is high but no longer accelerating.”
The rollover began in February 2018 and until PMIs, still at elevated levels, stabilised there would be a period of economic insecurity of determining if it is a slowdown or expansion.
Trade war talk bluster, so far
But macropolicy was in uncharted waters, where normalisation of interest rates was different to tightening.
“We’re in a different environment right now and rhetoric coming from the US complicates macropolicy, so the risk of a mistake is not trivial,” Bitel said.
She said US president Donald Trump’s trade war rhetoric was Twitter-fueled but without policy backup, particularly with protectionist rhetoric with China.
“These supply chains are so intertwined that it’s not in anybody’s interest to disentangle them or to break them up,” she said. “The short-term trade-off between trade and growth will be so materially affected that no public official [who does so] has any chance of being re-elected (including Trump).
“It’s not a massively material risk at this point; nevertheless, lots of rhetoric, lots of tweets, lots of really unhelpful uncertainty, but nothing of policy at this point.”
But if the world is heading for slowdown, Bitel suggest that authorities, which prevented a macroeconomic meltdown in 2009, still have levers to pull.
“Collectively, financial market participants have grown up professionally in a world where interest rates were set between Zero and 5 per cent after massive disinflation and have been coming down structurally for 30-plus years, so now it’s difficult to imagine interest rates going up,” Bitel said. “They could go up but it is just as likely interest rates could stay low and liquidity could be injected, as it was in the 2008-09 crisis, and to suggest that we’ve run out of options I think is a little premature.
“It’s equally important to understand where the source of slowdown is in terms of assessing how to respond to it.”
While markets have been looking for signals of inflation for at least two years, it was difficult to “disentangle” structural from cyclical signs but technological advancement and disruption suggested disinflation was only a few years into to a 12- to 20-year structural cycle, she said.