What’s our base scenario?

The world economy is in good shape and we expect stock markets to reflect…
Steven Bell

Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions

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The world economy is in good shape and we expect stock markets to reflect this. Unemployment is falling at the global level and should continue to do so as companies with strong profits continue creating jobs.

Importantly, inflation is a benign influence, residing in what could be described as ‘Goldilocks’ territory, being neither too high which could require damaging rises in interest rates nor too low to morph into the mortal enemy of economic growth: deflation.

Risk assets better placed than bonds

The global economic upswing has been long but shallow and inflationary pressures remain subdued. This creates a fertile environment for risk assets.

But while we expect equities to perform reasonably well with corporate earnings continuing to grow, even against the headwind of rising interest rates, we fear that government bonds and corporate credit may be vulnerable as the unprecedented central bank stimulus is wound down.

Global tensions on the rise

While our overall economic view remains upbeat, we concede that there are clouds on the horizon. The US Federal Reserve (Fed) is currently raising interest rates, as are other central banks. We are also witnessing an escalating trade war between the US and China, which is straining relations between the world’s two most powerful nations. Elsewhere on the geopolitical stage, we look on with unease as Brexit and a surge of nationalism threaten the established order in Europe.

Risk Disclaimer

Past performance should not be seen as an indication of future performance. Stock market and currency movements mean the value of, and income from, investments in the strategy are not guaranteed. They can go down as well as up and you may not get back the amount you invest.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Global GDP Growth Forecasts (% year-on-year)

Chart showing GDP Growth (% YOY) in 2012-2018

Source: Bloomberg, as at September 2018

The chart displays the evolution of consensus expectations for growth in a particular year. While it illustrates a historical pattern of over-enthusiasm for growth at the start of the year, more recently (2017 and 2018), this has changed. Analysts have underestimated the growth trajectory for global economies, which has supported the strong performance of risk assets.
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The global economic upswing has been long but shallow and inflation pressures remain subdued. This creates a fertile environment for risk assets but we fear that government bonds and corporate credit may be vulnerable as the unprecedented central bank stimulus is wound down

Number of OECD Countries with Low Core Inflation

Graph presenting number of countries with Core Inflation and Deflation in 1990-2020
Source: Minack Advisors, as at September 2018

Opportunity as growth diverges

A feature of the next five years is likely to be the end of the recent ‘synchronised growth’ phase of the global economy and a return to more uncorrelated growth rates. This can be expected to translate into more differentiated performance by asset markets, which will in turn bring more opportunity for informed investors to make attractive returns.
Interesting times lie ahead as the global economy seeks to establish a new equilibrium both in the context of normalised monetary policy and global trading relationships.

OECD Policy Rate Changes (yoy)

Graph presenting OECD Policy Rate Changes (YOY)
Source: Bloomberg, BMO Global Asset Management, as at September 2018

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