Global quarterly outlook: low rates, pro-risk

global perspectives

Global quarterly outlook: low rates, pro-risk

Salman Ahmed, PhD - Chief Investment Strategist

Salman Ahmed, PhD

Chief Investment Strategist
Charles St-Arnaud - Senior Investment Strategist

Charles St-Arnaud

Senior Investment Strategist
Jamie Salt - Analyst

Jamie Salt

Analyst

We continue to envisage a “No Recession Yet Tricky” situation prevailing for the rest of the year and expect a deeper “search-for-yield” environment is likely to take hold.  The Federal Reserve has become significantly more dovish, presaging what we believe will be a move towards some form of price-level targeting and cementing the case for low real and nominal interest rates. Together with the European Central Bank staying very accommodative, this cements the outlook for rates remaining low-for-longer against a backdrop of stabilising global growth.

The low rate backdrop, coupled with signs of stabilisation in China, should generate a positive framework for emerging market performance as 2019 unfolds, we believe.

Chinese indicators are more positive amid the latest bout of fiscal stimulus, and the US and China are expected to agree to resolve parts of the trade dispute.  Such developments have the potential to allay the slump in global manufacturing and could lead to worldwide growth steadying. Volatility, however, is likely to persist.

The low rate backdrop, coupled with signs of stabilisation in China, should generate a positive framework for emerging market performance as 2019 unfolds, we believe. This leads us to maintain a pro-risk stance.

 

We expect the following key factors to shape the global economy:

  • The pivot from the Federal Reserve heralds a significant move towards some form of price-level targeting and cements the case for a low interest rate environment, in our view.
  • We continue to believe the European Central Bank (ECB) will not hike in this cycle as its policy reflects the sharp deterioration in Eurozone growth momentum.
  • We believe that the Chinese economy has turned a corner amid noteworthy fiscal stimulus.  We expect trade tensions will ease (but not disappear) and the most recent data for the country is positive.
  • Global manufacturing is decelerating and below trend, and Eurozone economies have slowed markedly. Potential resilience in services and green shoots in China could be supportive, even as multiple risks also threaten the outlook. We continue to see a global recession as unlikely.
  • Following the latest 6-month extension to Brexit, we expect continued uncertainty as the deadlock persists.
  • Fractured liquidity and the rise of populism could create a strong source of volatility.

 

Investment implications:

  • Emerging market risky assets are expected to outperform developed market assets
  • In fixed income, we prefer corporate credit, especially in the BBB to BB segment
  • Convertible bonds could offer downside protection amid rapid shifts in the policy environment
  • In foreign exchange, a rangebound USD/EUR could contrast with emerging market currencies grinding firmer
  • We are neutral GBP after the latest Brexit extension.  

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