What is the outlook for global growth?

What is the outlook for global growth?

MacDonald, Sheldon_700x450
Sheldon MacDonald is senior investment manager at Architas

The past few months have seen a return to favour of asset classes associated with strong global growth. Commodities such as oil and copper have bounced sharply and emerging market heavyweights such as Brazil and Russia have outperformed. Does this rally indicate that global growth and demand are finally picking up again, or is it just that these dogs are finally having their day?

Growth rates in the developed world have crawled to a near-standstill in recent years and, despite the monetary stimulus, including negative interest rates, GDP growth in Q1 was almost non-existent. Add in current constraints on investment and spending in the UK economy ahead of the EU membership referendum and the picture is uninspiring.

On cutting forecasts once again, the IMF commented that global growth has been “too slow for too long”. Indeed, for two years there has been a “protracted unwinding of prior excesses in China”, which has been a driver of global GDP growth over the past 20 years. However, with China having rebalanced its economy away from investment and towards the service sector, this dampening effect has now diminished.

Unorthodox policies such as quantitative easing appear to have proved ineffective, bringing forward asset price returns rather than driving aggregate demand. The next step may be for governments to provide a boost by way of fiscal stimulus.

O’Connor, Paul_700x450
Paul O’Connor is head of multi asset at Henderson Global Investors

One notable feature of the post-crisis market environment is how risk assets have shrugged off growth disappointments, instead taking inspiration from the support provided by the central banks. In our view, this era of policy-driven markets is over. The interest rate cycle is turning up in the US and monetary policy is losing potency elsewhere, particularly in the eurozone and Japan. As the influence of monetary policy recedes, growth becomes an increasingly important driver of risk assets.

The news has been disappointing on this front since last summer. Consensus forecasts of economic growth and inflation have been persistently downgraded and expectations for 2016 earnings growth slashed from 12 per cent back then to 2 per cent today, undermining investor confidence and culminating in Q1’s growth scare and market correction.

Of course, markets have rebounded more recently as macro momentum has recovered in the US and China and rising commodity prices eased fears of deflation. While we believe that the underlying trend in the global economy is for the recovery to continue, we expect the path to be bumpy. From a growth perspective, China and Japan are two clear areas of vulnerabil-ity, albeit for different reasons. In the US, where the recovery looks more secure, the relationship between growth surprises and markets is becoming more complicated as investors now have to consider the impact on interest rates.

Hambidge, David_700x450
David Hambidge is director of multi-asset funds at Premier Asset Management

It is no great surprise that the IMF has downgraded its global growth forecast as this follows the pattern of the past few years. This is not meant as a criticism of the IMF’s work, but the reality is that this annual report involves a huge amount of data input and takes a long time to produce.

Therefore, by the time it is published it may be out of date, and with investors far gloomier about the prospects for the global economy in January than now, this looks to be the case on this occasion.

That said, we have been highlighting to our investors for some time that owing to high levels of debt and ageing populations in a number of larger developed nations, as well as a marked slowdown in emerging markets, global growth is going to be far weaker going forward than we have become used to over the past few decades.

This will inevitably have an impact on investment returns, which will be lower than we have enjoyed over the past 30 years. This is particularly true in the case of mainstream asset classes, such as equities and, certainly, bonds.

However, while global growth is slowing, the world economy will continue to move forward and there will be plenty of opportunities to make decent investment returns, although investors will have to think a little more outside the box than they have in the past.