A Window of Opportunity

For the first time since 2007, the world’s major economies are growing together.

As the International Monetary Fund (IMF) recently stated in a note for the upcoming G20 meeting, growth increased in the second semester of 2017.

This growth comes from strong investment and trade. But also from the US tax cuts.

In fact, after the US tax cuts the IMF increased its world growth forecast for 2018 and 2019. They expect the world to grow by 3.9% in 2018 and 2019. That is a 0.2% increase from the previous forecast.

But don’t get too comfortable with this synchronised world notion…it may not last long.

As the IMF states, ‘the positive momentum expected for 2018 and 2019 will eventually slow, implying a challenging medium-term outlook for many countries.

Why?

Well, as the IMF warned, downside risks are accumulating.

The recent volatility illustrates the financial stability concerns from elevated market and liquidity risks, weakening credit quality, and high corporate leverage; with potential repercussions for short- and medium-term growth. U.S. financial conditions could tighten faster than expected.

Central bankers around the world are looking to reverse eight years of monetary stimulus. Things could get interesting this year…

The Bank of England raised rates last November for the first time in 10 years.

The US Federal Reserve Bank will be meeting this week and investors are expecting more hikes. In fact, markets are pricing four hikes this year instead of the initial three.

The Fed is looking to increase interest rates. But they also want to reduce their bond holdings by US$10 billion a month — increasing the amount until it reaches US$50 billion a month.

The IMF is expecting interest rates to rise and financial conditions to tighten.

What could happen if central banks start tightening things?

The following chart shows how the Fed’s balance sheet and the S&P 500 have been moving in unison:

How the Fed propped up the stock market 19-03-2018


Source: Financial Times
[Click to enlarge]

If the Fed starts reducing their balance sheet and making credit more expensive, we could see the opposite of what we have seen in recent years.

That is, it could mean that asset prices go down and credit starts falling…

…and all that massive debt accumulated could become a burden as the ‘asset rich’ get poorer.

A recent note from Fidelity Viewpoints explained that although most of the major economies are expanding, their view is that global activity could be peaking. 

Their reasoning is that for the first time in five years international stocks have done better than US markets.

In particular, as Fidelity pointed out, ‘the United States is experiencing a mature expansion, with mid-cycle dynamics and some hints of late-cycle trends.

Check out the following graph which shows the global economies and the different phases of the business cycle.

Global economies and the business cycle 19-03-2018


Source: Fidelity
[Click to enlarge]

It shows Japan, Brazil, Europe and India in mid cycle; and the US, China, Australia, Canada and the US in the late expansion cycle.

As Fidelity explained, the US usually ‘matures quicker’ than the rest of the world. Which means that generally, when the US economy reaches the late stage in the economic cycle, international economies are just reaching mid cycle. As a result, their stocks tend to do better.

As Fidelity continued:

The US late cycle has traditionally been characterized by growing inflationary pressures and rising commodity prices, which have tended to boost emerging-market (EM) equities due to their exposure to commodity exports and strong global growth.

As the IMF note for the G20 meeting warned, this synchronised growth may not last long. The IMF concluded the report by recommending countries to ‘build buffers’ and ‘improve financial resilience’.

As they said, ‘the current juncture offers a window of opportunity to push policies and reforms that protect the upswing and raise medium-term growth to the benefit of all.

Investors should be doing the same

There is a tendency to project the present into the future when making decisions. The propensity to think that recent events or results are more likely to repeat themselves than events in the past.

In other words, that things won’t change.

But we should be bracing for change.

We should look at this time as a ‘buffer’.

As a ‘window of opportunity’ to prepare for change.

As extra time to revise our portfolios, check for risk and change positions accordingly.

Inflation is starting to show and central bankers are looking to increase interest rates and reduce their balance sheets.

The good times won’t last forever.

Don’t say no one warned you.

Kind regards,

Selva Freigedo,
Editor, Markets & Money

PS: Editor Vern Gowdie from The Gowdie Letter thinks we could be heading for a crash soon. That’s why he has prepared a step-by-step guide to help you prepare. If you want to find out more about it click here.


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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