Uncertainty is dominating global markets resulting in the very volatile equity markets. The three main areas of uncertainty are as follows:
- When will US interest rates rise?
An increase in US interest rates will start taking liquidity out of the economy, slow US economic growth and boost the US dollar. Or, ultimately, give the sign that the US economy has survived the credit crisis of 2008/9 and is on the road to recovery. The alternative view is the US and global economy is in “intensive-care” and hence a rise in interest rates will be like switching off the “life support machine”. This will result in a likely economic recession. Therefore, there are strong views whether the US can afford to raise rates or still needs to maintain current levels until there are more meaningful signs of US and global economic growth.
- Expected global inflation or deflation?
Deflation is the “kiss of death” for markets as it leads to an economic recession. Low growth in developed world economies and slowing growth in China combined with a sharp decline in commodity prices (input costs) provides a serious risk to global deflation. Consequently, prevailing low interest rates globally are there to stimulate growth and promote inflation.
- China’s economic slowdown or “hard landing”
The legitimacy of China’s strong economic growth has been questioned for many years with a fear of an eventual unravelling and a major downside revision to economic growth. Or, is it that China’s strong growth – driven by infrastructure and industrial expansion – can be transferred to consumer growth resulting in a more balanced sustainable expansion? The Chinese government has said growth of +6% into the future should be maintained. This is being supported by recent monetary stimulus which is still in abundance, but is it sufficient to drive a smooth economic transition, which is vital to supporting many other struggling economies in the world?
Conclusion
Experts don’t know the outcome of these uncertain macro economic factors and certainly, we don’t either. Therefore we continue to recommend a more cautious diversified investment portfolio. Once these uncertainties are dismissed, which we believe could take at least another year, we’ll recommend a more aggressive investment strategy.
