Things are looking good. We are confirming our gross-domestic-product (GDP) forecasts for the global economy, we do not fear a (sustained) uptick in inflation or interest rates, and some equity markets are trading near their historic highs. Yet, our fund managers are entering the summer recess with unusual trepidation. What explains this apparent contradiction?
As is so often the case, it all depends on how we assess and weight the known factors and the unknown ones. We know there is good economic and corporate data in many parts of the world, a still accommodating interest-rate policy and no deflation concerns. But then there are the unknowns. After years of easy money, how will markets react to central banks reducing their balance sheets from the second half of the year? How long will the long autumn of this economic cycle last? And will countries begin to turn down in lockstep – the same way they entered the upswing? In Europe, meanwhile, there is the danger that immigration will drive the European Union apart – unless Merkel-Macron surprise us all with a consensus-building initiative. A further unknown is U.S. policy. We cannot accuse President Trump of being unpredictable; he is simply following through doggedly on his campaign promises. But Congress and the courts are challenging him less and less, and even his own party has thrown in the towel. We are probably not the only market players who had hoped things would turn out differently after the election. So far, the new administration has regularly crossed what had previously been considered red lines. Likewise, it is not shying away from hurting domestic sectors and companies. For this and other reasons, the November midterms may add a significant twist to U.S. politics.
Our main scenario remains, however, that the global economy will not suffer lasting damage at the hands of policymakers. So we do not fear an abrupt end to the upswing. Despite generous central banks, we see no widespread misallocation of capital in the real economy like in past cycles. Brussels, for its part, is currently asking for increased consideration of ESG (environmental, social and governance) factors by asset managers. We welcome this, as sustainability criteria have long been a key component of our investment process.
Stefan Kreuzkamp, Chief Investment Officer