Wealth Management: Market Perspective – Unfinished business

Kevin Gardiner, Global Investment Strategist, Wealth Management

Slowdown was a mid-cycle event

It is too soon to be sure the global slowdown is done. Data are still best described as patchy. But two years is par for the course - like the preceding acceleration - and we need good reason to expect things to worsen much from here.

A resumed escalation in trade tensions is still possible. The US-China deal is partial, and imperfect, and President Trump still has that Twitter account - we take nothing for granted. But the deal offers temporary respite at least. And if China does buy the extra US exports, it might add 1% to US GDP over two years.

Since 2016 we have suggested that the range of possible outcomes on trade are not all bad. It is China, not the US, whose economy is the most closed, and which has gained most from the post-2000 status quo. Mr Trump has been undiplomatic, but has had a point. China knows it, just as it knows that eventual liberalisation remains in its own best interests.

The deal could collapse. But it could also herald an improved trade regime, much like when President Reagan blustered his way into military détente with the old USSR in the 1980s.

Meanwhile, this record-breaking US expansion has few excesses in need of correction - consumers, banks and inflation have been well-behaved throughout. And some of the slowing reflects specific difficulties faced by two important cyclical sectors - global autos and US airframes - rather than any macro malaise. Their recovery is impossible to predict confidently - but when it happens, it will likely be V-shaped.

Policy is also friendly. In 2019, the Federal Reserve, together with the European Central Bank and the People's Bank of China, delivered extra monetary stimulus - in a monetary climate that was pretty benign to begin with. Such insurance is far from infallible, but it may help a little. And fiscal policy is also turning more pro-cyclical in some big economies - including the UK.

Some revival in global growth is arguably now the default - the burden of proof increasingly lies with pundits who still expect a more dramatic retrenchment. Meanwhile, US corporate earnings seem to have been growing again in late 2019.

The Wuhan virus does pose a new near-term risk - it will hit the Chinese and regional economy noticeably (though relief spending will provide some cushion). And rising markets have delivered profits to be taken.

But such epidemics do not last long, and the human cost might best be considered alongside the ravages of more 'routine' illnesses and accidents. It may prolong this mid-cycle turning point, but if so makes an eventual reignition more likely, not less. 

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Market Perspective - February 2020 - Figure 1

Click here to continue: Market Perspective: Even lower for even longer?

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