Newsletter
Rob Hayward
March 2020
Economic conditions
The outlook for the world economy has been adversely affected by the Coronavirus. Economic activity in China will slow at least temporarily. This will also affect other parts of the world. These expectations have resulted in lower prices for emerging economy equities (EEM) and demand for government debt (TLT). The resultant fall in bond yields should provide some support to economic recovery in the rest of 2020. The economic slowed also makes it more likely that central banks will cut interest rates.
Economic growth in a number of emerging economics such as India, Mexico and South Africa has been lower than had been anticipated. However, there are signs that fiscal and monetary policy may respond. The rate of growth of international trade has been disappointing. The simmering US-Chinese trade dispute and the effect of extreme climate conditions in Australia and elsewhere are factors clouding forecasts about future economic activity.
Projections
| Indicator | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|
| World growth | 3.0 | 3.0 | 3.3 | 3.5 |
| US GDP | 1.8 | 2.0 | 2.0 | 2.2 |
| US Inflation | 1.8 | 1.8 | 2.0 | 2.0 |
| US Unemployment | 3.0 | 2.8 | 3.3 | 3.5 |
| US bond yield | 2.0 | 1.8 | 2.0 | 2.2 |
Upcoming events
US interet rate outlook: the central bank projects stable rates in the coming year. However, many market participants believe that, as has been the case since the Global Financial Crisis (GFC) disappointing US economic activity and low inflation will cause a change in attitude at the central bank and the possibility that US interest rates may be reduced.
US Presidential elections: are coming into focus. The Democrat primaries have the initial attention. International investors feel that Trump is the devil-you-know compared to the possibility of either Saunders or Warren. Biden may be more conventional but hopes for an easing of trade tensions with a Democrat President are likely to be disappointed.
Assets
- Stocks US (SPY) and Chinese stocks (EEM) are cautious due to the economic effects of the Coronavirus. Previous experience suggests to some that this will be a short-lived shock and that a rebound will follow shortly. However, it is unclear how far the virus will spread.
Bonds Government bonds benefit from the concern over economic growth and the increased hope for lower interest rates. The spread to higher yield bonds (JNK) has widened as they are affected by increased credit risk.
Gold (GLD) is well supported for now by uncertainty and rising risk.