There is no doubt, there are reasons to have some concern about the global economic outlook. Talk of looming financial disaster does appear to have gained momentum recently. These heightened fears are based upon the following observations:
- Global debt is at record levels relative to GDP, which leaves little room for additional fiscal measures if they are required down the track.
- Efforts undertaken by central banks in the world’s major economies, such as quantitative easing and negative interest rates don’t appear to have worked.
- Globally debt is increasingly trading on negative interest rates, which is distorting asset values, and leading to the risk of asset bubbles.
- There is a populist uprising against rationalist economic policies of deregulation, privatisation and globalisation/free trade. This is being fuelled by rising inequality, particularly in the US.
- Geopolitical tensions are rising. The relative decline of US military and economic power is changing the world from one dominated by the US, to one where countries such as China, Russia, Iran, Saudi Arabia are moving in to fill the gap.
These developments point to the risk of slower global growth and investment returns ahead. However, to balance this view, leading economist Shane Oliver recently published an article about why he is not so concerned about the global outlook, and it is certainly worth considering his counter arguments here.
- Global debt is more complicated than being at a record high – Just because debt is at record levels, does not mean that a crisis is imminent. Debt after all, has been trending upwards since it was invented, and low interest rates mean that the debt burden is low.
- QE’s end point is not necessarily negative – Quantitative easing does appear to have helped, before being derailed by a combination of Trump’s trade wars, debt squeeze in China and tougher auto emission controls. How quantitative easing will eventually be unwound is hard to predict, however there is nothing to suggest that it will end with financial disaster.
- Inflation and interest rates are low – Good returns this decade have come from assets like shares and property which have had a valuation boost in the low inflation and low interest rate environment.
- Rapid technological innovation and growth is middle-income Asia is continuing – These two factors continue to underpin the positive outlook for global growth.
- Global growth may pick up – Whilst we have seen a slowdown in global growth over the last 18 months, and an associated share market volatility, the conditions are not the same as at the time of the GFC. Rather, there are signs pointing to global pick-up ahead, including bond yields trending up, the US yield curve is now mostly positive, European and Japanese share are improving, the US dollar may have peaked, and business conditions PMIs for US, Europe and China may be stabilising.
So, whilst acknowledging the legitimate global concerns, there is some reason to expect the global economic cycle to turn up in the year ahead, which would be positive for growth assets like shares.
Sound Financial Planning
Most importantly for our clients, is how we manage their portfolios in the current investment environment to achieve their long-term financial goals. The essential components of sound financial planning are; understanding clients’ investment objectives, risk tolerance and time horizon. Then, asking the most important question – is the long-term mix of assets appropriate?
To discuss your individual circumstances, or any questions you have about the economic outlook, please do not hesitate to contact me on 02 9908 9888 or email firstname.lastname@example.org.
Kate is an Authorised Representative of Hillross Financial Services Limited (AR Number 1007833).