The US economy is slowing leading to increased expectations that the global equity markets will cont...
The US economy is slowing leading to increased expectations that the global equity markets will continue to rise.
Steve Cleal, head of investment funds at Morley, says expectations following the Fed's interest rate rises earlier this year were that it would take a long time for the economy to slow which would in turn hold back the US and global equity markets. He adds: "The slowdown of the US economy is a double-edged sword. It is positive in that it reduces the chances of the Fed raising interest rates further which could lead to a recession, but it is also negative as a slow US economy will depress all other economies."
US equities are now on a stronger footing and bond yields that drifted lower have now rallied, Cleal says. Investors could have reason to be optimistic, but there is also a risk that activity could bounce back due to mortgage rates being trended down, continued high consumer confidence and the US labour market being tight.
Cleal says: "The economy shows some signs of re-accelerating, in which case optimism would disappear." If a re-acceleration occurs, it will lead to higher interest rates and bond yields and a possible US recession.
Cleal forecasts that the US economy will run along at around a 3% growth rate, in which case, the impact of a slowdown will not be that dramatic.
Based on a soft landing assumption, Morley likes Pacific equities and emerging markets, which are sensitive to US interest rates. Cleal says: "Concerns about interest rates will be good for emerging markets." He also likes Brazil, which would benefit from sustained interest rates.
On a global level, Cleal is optimistic about the Japanese economy, believing Japan will outperform the US in the short term. After years of a weak economy, Japan looks to be stronger next year, which will be good for profits. At present interest rates being close to zero in Japan, bond yields are high.
Nigel Morgan, an economic strategist at Old Mutual points out that as the US economy is still accelerating, it hasn't had an effect anywhere else yet.
He says: "Rises in interest rates, oil prices and the US dollar will all combine to slow the US economy down. If the US slows down then every other economy will also slow down." He forecasts that the US growth rate will go from 5-6% to 2-3%.
Morgan favours Europe in a US slowdown scenario as it raised interest rates later and has a very weak euro. He believes this will lead to Europe not slowing down until next year. Like Cleal he also notes that Japan is picking up.
Keith Wade, chief economist at Schroders, is expecting a soft landing to the US slowdown to about a 3% pace next year. Using a macro model, Schroders investigated the impact of a 1% fall in the US economy.
If the US had to raise rates, Asia and Latin America would be the most affected. Both have strong trade and financial links to the US. Within Asia, Japan would be the most strongly affected as they cannot reduce their interest rates very far. Whereas the Central Bank in Europe could modify rates as growth slows.
On the back of this, Schroders is overweight European and UK equities and underweight Japan and the Pacific.
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