There are opportunities for those who peer up from convulsions at homeby Duncan Weldon / April 2, 2019 / Leave a comment
While the last six months of 2018 were far from a pleasant time for investors, 2019 got off to a much perkier start. Readers in Brexit Britain may find it surprising that this is a decent year to be an investor, but there are opportunities for those who peer up from convulsions at home and take a chance abroad.
Global equity markets, together with commodity prices, have enjoyed a strong rally and even UK shares, though inevitably buffeted by continuing Brexit-related uncertainty, have—at least as I write—managed a decent bounce.
Global investor sentiment appears to have swung sharply from the unseasonal gloom of Christmas Eve (when US shares shed over 2.5 per cent of their value in one trading session) to today’s relative optimism. The shift can be explained by developments in the world’s two largest economies.
At the height of last year’s sell off there were two distinct fears: that the US Federal Reserve intended to hike interest rates to a level that would seriously harm growth and corporate profits—and that China’s economy was slowing sharply. Both worries have for the moment receded.
Of all the major world central banks, the Fed has moved the furthest to “normalise” monetary policy after the extraordinary years of ultra-low interest rates that characterised most of the last decade. Since December 2015 US rates have been raised eight times and now stand at 2.5 per cent—still a historically low level, but much higher than in the UK, eurozone or Japan.
Last Autumn Fed Chairman Jerome Powell feared a tighter US labour market would begin pushing up wages, and that keeping inflation in check would thus require around three more hikes in 2019 and two more in 2020. Markets worried that the Fed was tying itself to a pre-set path that would take borrowing costs well beyond what the economy could cope with.
Powell, though, has now pivoted and the hikes, for a few months at least, are on pause. This move from the world’s most powerful central bank has helped propel asset prices higher not just in the US, but globally.
Policy has also moved in the world’s second largest economy. Although it is still—by headline exchange rates—a smaller economy than the US, China has actually contributed more to overall global expansion than the US in every year since 2006.
But as China now becomes richer, there is—inevitably—a downward shift in the pace of expansion, which has dropped from over 10 per cent to nearer 6 per cent. That was baked into market thinking, but what rattled them last year was the idea that growth was actually falling even more sharply. That would have had serious implications for commodity prices, growth across Asia and the profits of European and American exporters.
The fears of a sharp slowdown, however, are now receding. Credit growth—which tends to be a strong leading indicator in China—picked up sharply in January and the National People’s Congress has reaffirmed that measures—including tax cuts for manufacturers—will be taken to shore up growth.
An unusual combination of Powell and the Politburo have come to investors’ aid. With the Fed on hold and Chinese growth exceeding expectations, risk appetite has again picked up. The environment is one that could just reward the bold.
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