Starting from the top…
Our clients are increasingly asking about how they should factor the changing global economy into their planning and especially their capital allocation decisions. Surely they can think of harder questions! But seriously it is a good question although, as I always stress, it is important to bear in mind that the macro picture is only one of the drivers that should drive decisions.
…there are signs of some good news emerging…
There is some good news. Stock markets are generally buoyant, Brexit has not caused the UK economy to fall off a cliff and the Eurozone appears to have weathered the recent difficulties caused by the return of concerns over the strength of the Italian banking sector and the latest review of the economic situation in Greece.
In fact, the good news goes further. Growth in the USA appears to be maintaining reasonable momentum, the recent survey data in Europe suggests a strengthening economy, Japan is performing reasonably well and emerging markets appear to be improving as commodity prices strengthen. Overall the outlook is more positive as reflected in improving sentiment.
…although not everywhere…
However, before we get too excited, other news highlights the downside risks to growth. China has cut its target annual GDP growth rate from 6.7 to 6.5%. The expected continuing rise in US interest rates is likely to squeeze financial flows to emerging markets, while previously fast growing markets such as Brazil, Mexico and Russia are still struggling to generate strong positive economic momentum.
…so it is about picking winners.
The global macro picture is still one of convergent divergence. Growth rates between the major economic blocs are converging: no longer is China growing at 6 times the rate of the developed world and the gap between the USA and Europe has narrowed. However, the drivers of economic performance are becoming different by country as policy agendas diverge, think Trump, Brexit and Eurozone for example, all pursuing very different policies. The days of allocating capital by targeting a theme such as the BRICs are long gone, segmented opportunity analysis is the order of the day even for top down macro driven thinking.
A range of possible outcomes in the USA…
A new administration with a radically different policy agenda makes economic forecasting for the USA very difficult. There are a range of potential sources of stimulus such as tax cuts, investment in infrastructure and deregulation but curbs on migration, public sector spending cuts and protectionism could work to reduce growth. It is hard to identify the right strategy for capital deployment in the USA.
The major unknown is how might protectionism impact the American economy? Generally, economists are clear that trade and openness are good for economic growth but in the case of the USA, the economy is so large and wealthy that it is not clear exactly what the impact of a restrictive approach to trade might be.
… a potential upside for the brave investor in the Eurozone…
The survey data emerging from the Eurozone is relatively positive after a strong actual performance in 2016, with Germany and Spain both having had good years. The outlook remains solid and the ECB appears determined to continue to pursue a growth supportive, loose monetary policy for as long as it can. There are signs of a balanced recovery developing as consumer spending is increasingly supported by increased business investment and unemployment is falling.
Politics will play a major role in the Eurozone in 2017 with elections in major economies such as France, Germany and possibly Italy. Investors may well be concerned about the risk of so-called populist parties gaining positions of influence. However, this means there is the potential for a market rally if the recent result in the Netherlands is repeated and the populist movements fail to achieve their aims. Gambling on this may, however, be for the brave.
…and slower, steadier growth in China…
China appears to be accepting that its future growth will be less than in the past. Nevertheless the huge size of the country means that it will continue to stimulate huge amounts of economic activity. China seems set on a course to rebalance its economy and make it less export led with an increased focus on stimulating domestic consumption.
Opportunities are likely to arise in China around this rebalancing with domestic companies certain to be in the vanguard. Reasonably steady but still significant growth in China will bolster emerging markets, especially those near to China, albeit at a slower rate than previously. Businesses that are potential suppliers to Chinese tourists are also likely to see their prospects improve.
…means balance and flexibility are key.
The macro outlook for the world’s three major economic blocs suggests there is no single bet to be had. In an uncertain world, a balanced portfolio seems to make sense. China offers scale and apparent stability whereas the USA and the European Union each come with uncertainty attached. The largest upside opportunity seems to be in Europe, if political risk reduces and the positive momentum continues, then Europe could have its best year for a while.