BlueBay AM: Growth is not dead!
BlueBay AM: Growth is not dead!
Mark Dowding, co-Head of Developed Markets at BlueBay AM, has issued his latest market insight in which he looks at the year ahead, with robust jobs data in the US and The Federal Reserve suggesting that it will be patient with monetary policy, it appears that investment opportunities will be there over the coming 12 months.
Mark Dowding, co-Head of Developed Markets at BlueBay AM, has issued his latest market insight in which he looks at the year ahead, with robust jobs data in the US and The Federal Reserve suggesting that it will be patient with monetary policy, it appears that investment opportunities will be there over the coming 12 months.
As we transitioned into 2019, it seemed that financial markets were gripped by fears of impending economic slowdown, which helped to fuel flight-to-quality trades, as markets continued to sell risk assets following on from the trend at the end of 2018.
However, the past week has seen a reversal in the wake of robust US jobs data, which continue to highlight the ongoing strength of the US domestic economy, and Federal Reserve (Fed) comments alluding to its ability to be patient as monetary policy adopts a more data-dependent path.
Following some wider swings in markets and plenty of hyperbole, it feels like an appropriate juncture to take stock of where we stand, as we assess the outlook for the year ahead and identify where we see the strongest investment opportunities.
What’s to come
Starting with the US economy, we continue to expect growth at an above-trend pace, with GDP expansion set to exceed 2.5%. Our confidence is based on the outlook for the US consumer.
Consumption is the dominant part of the US economy and, at a time when job growth, wage growth and lower taxes are all driving up disposable incomes, we feel that domestic trends can remain robust. We would highlight that the Atlanta Fed GDP Nowcast currently stands at 2.8%, and that with the exception of the new orders component of the recent ISM survey, we feel US data has been robust.
Inflationary pressures remain relative muted, though core CPI around 2.2% is broadly in line with the Fed’s mandate and we believe inflation is unlikely to fall if domestic growth remains robust and wages are rising.
In addition, we would continue to assert that policy remains relatively accommodative and is growth supportive.
Although there was tightening in financial conditions during the past year, this has been reversing as markets have stabilised and we feel that there has been a lot of mis-reporting of the implications of the inverting of the US yield curve, to which we would attribute little economic impact – save for seeing an uptick in mortgage demand as consumers book gains by refinancing at lower rates.
Looking east
By way of contrast, growth momentum in China continues to slow, with an ongoing slump in auto sales only adding to worries related to a hard landing. A sharp drop in PPI data to 0.9% (from 4.5% in the middle of last year) implies a material slowing in nominal GDP growth, which is also supported by recent PMI data.
Some policy easing has been delivered and more is sure to follow, yet deleveraging remains an ongoing theme and although recent trade headlines have provided some solace, we suspect that this may be more of a temporary cease fire than an end to the trade conflict.
Recent meetings with policy makers across the G7 continue to highlight mounting concerns related to Chinese hacking, data security and IP theft, and it has been noticeable how policy makers across developed markets are seeking to limit Chinese access to 5G technologies within developed markets.
All of this suggests to us that we should look for divergent growth trends to remain a theme in the year ahead.
In our view, if China downside risks can be contained then there is no reason not to believe that the Fed will continue to hike rates two or three times in 2019. Recent Fed minutes and comments from Powell and other Fed speakers suggest a patient approach and this is entirely understandable given moves in financial markets during the past couple of months.
However, March remains a long way away and if the US economy can continue to defy the bearish projections that many seem to have adopted, then this suggests that positive earnings growth can support equities and there is no reason why another rate hike in Q1 should not remain on the cards.
This will hinge on the economic data – yet we would seek to emphasise that less has changed in the economic outlook than has shifted in financial markets in the past couple of months – and it does interest us how some investors can be sucked into looking for a convenient narrative to fit to price action, leading them to conclude that growth must have slowed substantially when we would contend that it has not.
A shift in Europe
Economic sentiment in Europe has also become very bearish of late. However, we suspect that downside fears on this side of the Atlantic are also overplayed.
Eurozone unemployment dropped to a new cycle low of 7.9% this week and it seems that underlying domestic trends remain more supportive – even if external demand has dragged down growth