Since the start of the summer, bond and equity markets have been skittish. Investors are still debating whether weaker manufacturing figures across the globe, notably in China, are the sign of an imminent global slowdown or simply a shift in the balance of economic power. For Mark McFarland, global chief economist at Coutts, worries over an economic slowdown are disproportionate.
McFarland, who is based in Hong Kong, says: “When I watch Bloomberg and hear there is a great slowdown in China, it is not what I see. There is clearly a decline in manufacturing activity. A lot of oversupply has built up on commodity-related industries over the past five years, but the real question is on the health of the wider economy. In fact, the services sector is doing well. There are two ways of looking at China: there is the manufacturing side, which is in slowdown, and the services side, which is quite buoyant.” McFarland argues that, overall, there is still strength in the Chinese economy.
He also believes the furore over the Federal Reserve’s possible interest rate rise may have been overblown. In his view, the earliest the Fed will raise rates is the end of the first quarter, but he remains unconvinced that a 25bps rise will have a significant impact on financial markets.
In particular, he suggests the actions of the Fed are only part of a wider tapestry of central bank actions by the People’s Bank of China, European Central Bank, Bank of Japan and Bank of England. He says: “Arguably, the moves in Europe and Japan are more important. In Japan, it is the sheer size of the quantitative easing programme that is significant, and what the Bank of Japan decides to do next. Do they start to buy Topix equities, for example? In Europe, currency markets are certainly discounting another extension of QE, so the ECB’s decision on 3 December will be very important.”
“The consensus is still very much that the dollar is going north for the foreseeable future. There are good reasons for believing that but we think investors should be a little more wary."
Optimistic view
There are other elements that support a more optimistic view of the global economy, says McFarland. For example, even if the Federal Reserve does choose to raise rates, the pace of any rate hike is likely to be slow. Equally, the low price of oil – and McFarland sees no immediate change – is a real boost to developed markets, and emerging markets may be swept along in a rising tide. If anything, he says global economic growth might surprise on the upside.
He feels this is an environment in which it makes sense to take risks. Coutts has long had a preference for equities over bonds, though it has marginally reduced that overweight in the past six to nine months. The group is selective in its sector allocation.
