Six key themes
Liquidity
The cause of, and solution to, all of life’s problems, excess liquidity provision is a key driver of the increase in global asset prices. It has also left many assets looking highly correlated, which remains a key challenge for investment managers that are trying to achieve diversification.
Chinese capital misallocation
This suggests a growing banking sector bad debt problem, and China faces a potential hard landing. GDP growth is only sustained by adding capacity or dumping on the rest of the world. This is giving rise to significant capital misallocation and we expect further yuan depreciation.
Interest rates – one and done?
Global economic weakness will stay in the hands of the Federal Reserve. In practice, further interest rate rises may seem less likely because the world cannot cope with a strong dollar. The group is underweight US equities across its portfolios.
The case for secular stagnation Growth will remain weak while past excesses remain in the system. This is the result of easy credit, capital misallocation and excessive debt. Built up over decades, it will take time for this to work its way out of the system.
Bond market
Stresses in the US high yield market could point to problems ahead. Default rates are rising and this may have an impact on corporate credit generally. The group prefers sovereign bonds over corporate bonds as a result.
Politics not economics
Social inequality will drive a shift in policy from monetary to fiscal policy. The wealth gap has widened as loose monetary policy has inflated asset prices. This is creating social unrest, of which Brexit is just one manifestation.
