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A Peek Into Global Economy

Author: Siddhesh Ghare/Wednesday, June 19, 2019/Categories: Exclusive

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A Peek Into Global Economy

The US Federal Reserve’s move away from rate hikes and improving economic conditions in China triggered dramatic upswing in global markets in early 2019 unlike the volatility spikes witnessed in late 2018.  Trade wars, Brexit and European and political risks in the US are key factors that can drive volatility and threaten risk asset prices in the coming months.

Investors will need to work harder for risk-adjusted returns than they have done for the majority of the post-financial crisis period. Below are some of the opportunities and risks we see across asset classes and markets in the coming months.

China’s economic stabilization should drive increased investment there. According to the IMF, China is expected to drive 33% of global GDP growth in 2019, and is on track to surpass the US as the world’s largest economy by 2030. China could surpass Japan as the world’s second largest bond market. The US Fed’s decision to hold off on further rate hikes puts it in closer alignment with generally dovish central banks globally, which should help carry strategies to generate positive contributions to total returns for the remainder of 2019.

Global economy bends, but doesn’t break

The Purchasing Manager Indexes (PMIs), which remain above the 50 line separating expansion from contraction are now signaling somewhat below trend growth. Our base case for coming months is that the global PMI will stabilise above 50, implying a soft landing for the global economy.

China’s easing of monetary, fiscal and regulatory policy is helping to cushion its economy. Credit growth has rebounded and infrastructure investment is showing signs of life. Ongoing trade uncertainties create risks for business confidence, but we expect some de-escalation given incentives on both sides to avoid unacceptable economic and market weakness. Other emerging markets and developed markets like Japan and Europe have the potential to outperform.

An extended economic cycle

With the US economic expansion, poised to become the longest in the US history, investors are cautious on how long the expansion would continue. The Fed has now shifted focus to the stubborn downside misses of inflation to its 2% target over the last decade. This has led to increasing discussion of the Fed’s strategic framework and whether the central bank needs to rethink on its policy.

Risks to the base case

Risk assets have priced in much of the good news from these tailwinds. This leaves markets vulnerable to negative developments. Trade policy risks remain. Another concern is that the China stimulus is targeted at its domestic economy. Indeed, China’s stimulus is focused on boosting consumer confi­dence and small and medium enterpris­es. An unbalanced growth can be a cause for concern because if it continues alongside a US economy which is outperforming, the already expensive dollar could strength­en further. This could weigh on US corporate earnings and cause disruption for emerging markets, creating a potentially negative feedback loop.

The author is head- FX Risk Solutions Karvy Forex & Currencies Pvt. Ltd

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1 comments on article "A Peek Into Global Economy"

Umamaheshwaran

6/19/2019 9:25 PM

The information is highly useful. Thanks for your kind information.

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The technical studies / analysis discussed here can be at odds with our fundamental views / analysis. The information and views presented in this report are prepared by Karvy Consultants Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Consultants nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies is required to disclose his/her individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Consultants Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures or other derivatives related to such securities.

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