Philip Lawlor has experienced many business cycles during the three decades he has worked in the investment world, including 20 years running institutional money and then strategy roles, culminating in his position as head of asset allocation and strategy at Smith & Williamson.
With this wealth of experience, where does Lawlor think the global economy is in the macro picture? And how has the Brexit vote affected this?
Lawlor’s view is framed by a report he wrote in 2006, in which he said the sudden fall in the US 10-year bond yield to below 4% was a stark warning about the trajectory of nominal GDP.
“My view from then on has been that the big lesson we all have to heed, which played out in Japan, is the pernicious squeeze of adverse demographics and high levels of debt.It produces a structural downshifting in the growth trajectory of an economy. That is what we are still facing.”
“We think markets are a bit rich and my major concern, looking at the FTSE 250 in particular, is that analysts are asleep at the wheel in terms of their 2017 earnings per share forecasts. In other words they are flatlining, and something has to give.”
He disagrees with those who continue to reference the pre-2006 world they were familiar with. In terms of employment, for example, he argues that the ratio of employment to the population is about 4% lower than it should be, which goes a long way to explaining the absence of a feel-good factor.
“In this lower nominal growth regime, you hit air pockets. You have six months of good data and then it comes off the boil again, which is exactly what we seem to be seeing in the US.”
Lawlor says central banks must think more holistically about monetary policy if they are to address the issue of GDP. “It is starting to dawn on central banks that quantitative easing in the wake of 2008 crash is now becoming a negative influence in terms of a nominal GDP dynamic.
“We are all taught that inflation is too much money chasing too few goods. We are now learning that deflation is too much output chasing too little demand. Interest rates are at an artificially low level and that is keeping zombie companies going, which is exacerbating that deflationary force.”
As the debate continues on the macro backdrop, big questions are being asked of policy, both in relation to fiscal expansion and the role of the central banks in the funding of that fiscal expansion, he says.
“This demand side of the equation has to be addressed. Brexit is interesting from a parochial standpoint, but the much bigger debate is about this lack of traction in nominal GDP. It is only by getting nominal GDP up that you will get deleveraging.”
Brexit effect
But at a tactical level, Lawlor says the Brexit result is one example of how his strategic analysis played out. “We were nervous we would get a big Brexit wobble, so we bumped up our cash exposure to about 8%.
“At the beginning of July, 10 days after the Brexit vote, we put 5-6% of that cash exposure into index linked and corporate bonds. Our macro view is that bonds will do well, if nominal GDP across different regions remains anchored at current levels.”
One of the anomalies coming out of Brexit was the relative stability of the euro. “You have got two major reserve currencies in the world – the dollar and euro. Has Brexit increased the risk profile around the eurozone from a political standpoint? Of course it has.”
This is because the European Central Bank has not done any more easing of monetary policy and Europe has a big current account surplus, which, he says, is an important driver. But he is mindful Europe is facing Brexit negotiations, an awkward political cycle and, if the US were to start tightening its policies, a knock-on effect that would strengthen the dollar relative to the euro.
Currently, he is overweight the US, mostly at the expense of Europe, neutral in Japan and the UK, and overweight Asia ex China.
