It’s goodbye to Goldilocks – but not hello Bears just yet

It’s that time of year again when asset managers gather in front of the media to present their mid-year outlooks on the future of the global economy, markets and asset classes.

For many commentators, 2017 was largely seen as a ‘Goldilocks’ year – not so hot that it caused inflation and not so cold that it triggered a recession. So far 2018 has been characterised by the return of volatility, with the FTSE 100 hitting a 2018-low of 6,889 points on 26th March before hitting a 7,877 high at the end of May.

That means predicting the remainder of 2018 is tough. The Goldilocks conditions are deteriorating and it is against this backdrop that some investors are wondering about a shift to a less benign environment.

According to a recent market survey only 2% of investors expect a recession this year, but 41% are predicting a significant global slowdown next year and that edges up to 43% with regards to 2020.

There were some intriguing emerging themes from a mid-year outlook breakfast event that Citigate Dewe Rogerson organised this week.  The conclusion was that the global economy has moved from acceleration to consolidation.  Monetary policy is gradually returning to normal, markets are becoming more sensitive to sentiment swings and geopolitical uncertainty remains high.

It was forecast that this will remain the case over the next six months with US trade policy and Eurozone politics setting the tone. Risks remain that trade skirmishes will evolve into full-blown trade wars while the stance of the Italian government on issues such as the EU budget, immigration and markets reforms relative to the rest of the bloc will be crucial.

One commentator who is known for his clear thinking is Valentijn van Nieuwenhuijzen, Chief Investment Officer at NN Investment Partners. He believes the crucial question is how long the current period of economic consolidation will last.

Near-term indicators are positive and wage inflation is moderate while companies’ investment levels are not excessive, and their leverage is generally much lower than in 2008. Global earnings growth is solid for this year and next, even if the pace of growth will moderate in 2019.

The good news is that the environment is still supportive for risky assets but we should expect a deterioration in the reward/risk trade-off.  And that probably means goodbye Goldilocks but not hello Bears just yet.

Written by Jonathan Flint, Managing Director


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