This is a sponsored article from PineBridge Investments.*
Increased financial market volatility in 2018 has raised concerns about the durability of the long-running global business cycle — are we facing growing recession risks or continued, if slower, growth?
The trajectory of the global business cycle rests on the ability of the US Federal Reserve to successfully normalise monetary policy and engineer a soft landing for the US economy, and China’s capacity to calibrate its capacity to calibrate its economic policies and stimulate a slowing economy without creating a credit bubble.
Can the Fed Pull Off a Soft Landing?
We expect the Fed will be looking at an economy that is gradually losing momentum in 2019, in part due to its own tightening actions as well as to typical late-cycle labour supply constraints. We expect the Fed will pause or even more permanently suspend the current rate hike cycle by the summer of 2019. If the Fed stops at neutral, we expect the economy will land softly in 2020 with GDP growth at close to 2%, thus extending the current US business cycle beyond our forecast horizon.
China’s Balancing Act
The biggest headache for China is the more confrontational US trade policy. With the dispute unlikely to end anytime soon, authorities are focusing on re-stimulating a slowing economy using a combination of monetary and fiscal measures such as easing credit, boosting money supply, and cutting taxes. The problem is that China’s tools come with potentially serious side effects. Increased credit supply, for instance, will add to already high debt levels in the private sector.
We believe China can successfully lean against the negative impact of US tariffs and stimulate private sector growth. If China can prevent a more abrupt slowdown in 2019, the existing global business cycle could extend beyond our forecast horizon.
Where to invest
The road towards an extension of the global business cycle could take some twists and turns, where winners and losers will be widely dispersed. As such, we believe investors need to be active and selective to get the most out of their portfolios.
In equities, we expect to see opportunities in emerging markets, notably in China A-shares, Asia ex Japan more broadly, India, and Latin America. We also see a good growth potential in revenues and in the margins of companies that are producers and users of smart capex, both in the technology and industrials sectors, and more broadly, where we see companies benefitting from higher investment spending. These are company-specific, idiosyncratic alpha opportunities.
Meanwhile, although we believe fixed income markets will remain largely favourable in 2019, negative forces can emerge quickly and unexpectedly. A modest dialling back of risk in each segment makes sense in the current environment — reducing high beta exposures and incrementally lowering duration risk profiles, particularly in developed markets outside the US, as well as focusing on higher quality credits within segments.
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Last updated 6 March 2017.
This is a sponsored article from PineBridge Investments.*