Global issues facing financial markets
Should macroeconomic conditions improve, and global economic growth accelerate next year as growth picks up in the US and Europe, the prospect of a less accommodative monetary policy in the US, and how this might impact financial markets will be the main issue facing financial markets over the next two to three years.
"We've already started to feel the first ripples of the Federal Reserve Bank's prospects to pare back its quantitative easing (QE) programme in the form of smaller incremental bond purchases by the central bank. As such, QE is likely to end during the course of next year,” says Tristan Hanson, Head of Asset Allocation at Ashburton Investments.
When that happens, Hanson says we will see the world's attention shift to interest rate hikes. "When the Federal Reserve Bank begins to lift short-term interest rates in the first half of 2015 as expected, we will see investors who have become comfortable with zero interest rates in the world's largest economies, focus their attention on the eventual onset of a tightening cycle,” he says.
All eyes on Chinese growth
Given its much increased importance to the global economy over the years, the outlook for Chinese growth will be another determining factor in asset class returns next year.
"By the end of the decade, we expect trend growth to continue slowing in China to perhaps 5 or 6%. While this is most certainly slower than what the country achieved in the previous 30 years, it still represents strong growth by most countries' standards. As such, I'm not forecasting a financial crisis in China, although the risks have risen in recent years,” he says.
As the composition of growth is likely to shift, we can expect China to be less commodity intensive than was previously the case, and more consumer sector driven. This will result in the domestic consumer playing a greater role in China's financial, property and retail sectors, which will continue to excite investors.
Europe optimism
There is increased optimism about the euro region. "This is a stark contrast to 2011 and 2012 when fear was rife that the currency union could disintegrate. Whether this improvement can be sustained over the next couple of years, will have a strong bearing on investment returns, not just in Europe but globally,” he says.
While a fair amount of rebalancing has been achieved by the periphery countries in terms of unit labour costs or current account balances, Hanson notes economic conditions remain depressed.
Although things appear stable at the moment, the risk of political crisis or a negative shock to growth could precipitate renewed concerns.
High debt levels, asset prices and leverage
"Moreover, debt levels around the world remain extremely high despite the efforts of deleveraging. As a result, we live in a world driven by asset prices and leverage,” he says.
Hanson adds that another significant decline in global asset prices could result in severe balance sheet destruction, while another collapse in global demand could lead to severe recession. "The direction of asset prices therefore has considerable influence on economic growth,” he notes.
All that being said, Hanson believes the world is less vulnerable than it has been for close to ten years. "Being an optimist, I believe we are on the cusp of stronger cyclical growth in the global economy as many of the financial risks have diminished somewhat from where they were,” he says.
Editor's Thoughts:
It will be interesting to see how the levelling out of the commodities cycle will impact commodity producing countries going forward, especially in light of the fact that many of these countries form part of the emerging world. We can expect demand levels for commodities to flatten as fewer capital-intensive projects are initiated.Please comment online, interact with us on Twitter at @fanews_online or e-mail me your thoughts.
Comments
“Should macroeconomic conditions improve, and global economic growth accelerate next year as growth picks up in the US and Europe, the prospect of a less accommodating monetary policy in the US, and how this might impact financial markets will be the main issue facing financial markets over the next two to three years.”
I have a long winded response for you, but the less is more.
In short, the U.S cannot ever and will not ever stop Q.E because they have already lost control of the debt burden (17 trillion) they carry. Secondly they are the purchasers of the debt they are creating (bond market)- so stopping QE will ensure hyper inflation which increases the 17 trillion which they already cannot pay back. Either way the game is up and a new market will be found with a new reserve currency. China with backed gold.
All other major economies are also printing money now so that they can boost their own economies. So let’s see who’s going to get to zero value on their currencies first. Weimar race to the bottom.
Japan and China own 15 % of the U.S bond market. When they pull out the U.S bond market due to lack of faith in the U.S dollar yields increase hyperinflation option 2.
The third bubble is the equity markets, with no good news about except the odd company here and there still sucking up the last bit of fiat currency going around from the States and other countries printing. Real inflation edging up all the time but inflation baskets remaining bogus. This equity crash will make 2008 look like a non event. Markets are not supposed to run economies, economies are supposed to run markets.
"We've already started to feel the first ripples of the Federal Reserve Bank's prospects to pare back its quantitative easing (QE) programme in the form of smaller incremental bond purchases by the central bank. As such, QE is likely to end during the course of next year," says Tristan Hanson, Head of Asset Allocation at Ashburton Investments.
What Tristan has responded here, is a typical answer from someone who is in his position. What else can he say. My concern is that the 3 markets bond, equity and currency markets are fictitious, they are delusional and rigged. As a person in financial markets for 20 years next year, my biggest concern is that the brokers the financial planners the consultants and business owners are hoodwinked into believing that this will go away and this is just another phase. It is not. It’s going to break and not get repaired again. The next market will be a new one with new players and new rules.
There is increased optimism about the euro region. "This is a stark contrast to 2011 and 2012 when fear was rife that the currency union could disintegrate. Whether this improvement can be sustained over the next couple of years, will have a strong bearing on investment returns, not just in Europe but globally," he says.
This in my opinion is what is “suckering” people to stay in these markets. In my opinion it’s not that at all! It’s the international printing presses finding a home for the money they are printing out of thin air. Unemployment in Europe is rife and escalating. The biggest unemployment of youth in Europe in modern history. This is a market based opinion from Mr Hanson. I think the optimism is from a very small percentage of the elite at the top of the investment ladder who are benefiting from this paper printing machine. Looking at markets instead of the all important man on the street to gauge their assumptions. The thing is the man on the street is not invested with them.
It’s just a matter of time before the it ends, why is it that so many people in our profession are not prepared to make that call based on what’s in black and white in front of them? It’s because they have to perpetuate that lie so that they can feed their families and pay for their exorbitant lavish lifestyles.
The musical chairs are going to end sometime.
Thanks for the thought provocation this morning.
Kurt.
Report Abuse
The Rand could crash and our equities prices drop dramatically.
Why not state that in your articles? I find these "wishy washy" articles such academic masturbation.
Report Abuse