What is QIF?
The Quarterly Investment Forum (QIF) is an ongoing cross-investment team discussion and debate about the most relevant active risks in major markets and across asset classes and funds.
Each QIF is a mix of 'top down' and 'bottom up' perspectives, beginning with a 'top down' discussion of the major macroeconomic themes identified by the Asset Allocation Team. Each quarter, a rotating roster of portfolio managers present a 'bottom up' view of major active risks in their portfolios.
We have a unique depth and breadth of investment expertise across traditional and alternative asset classes in all regions globally. The QIF leverages that expertise through regular, structured communication between investment teams. The ultimate goal is to improve client outcomes.
3Q 2019 Quarterly Investment Forum highlights
Global risk factors in the investment landscape
A discussion of how the Fed rate cut will impact markets, and the global risks we are watching.
The Fed rate cut – a recessionary signal?
How markets react to the Fed rate cut in coming months will be an important signal.
The bull case for fixed income
The Fed rate cut should support growth and higher inflation.
Evan Brown, Head of Multi-Asset Strategy
The US Federal Reserve (Fed) cut rates by 25 basis points on 31 July. The question for investors is whether this is an insurance rate cut similar to Fed easing in 1995 or 1998 versus a pre-recession rate cut as happened during the Global Financial Crisis.
- The front-end rates market reaction is telling. If after the cut, markets price in even more easing over the next year and a half, historically that has been a negative signal for the economy. In the immediate aftermath of the cut, the rates market is indeed demanding additional easing—this has been exacerbated by the recent escalation in trade tensions between the US and China. We believe that the Fed will likely have to be more aggressive in easing policy in order to get ahead of the curve.
- We watch key economic data around labor markets and consumption. In this category, consumer confidence is strong, almost at cycle highs. Initial jobless claims are at 50-year lows.
- Financial conditions have eased since December, 10-year yields have declined, mortgage rates are down and corporate credit spreads have come in. This is supportive for the consumer and US businesses.
- We haven't seen recessions in the past without the fed funds rate surpassing nominal GDP growth annualized. We still have a very healthy gap from where the fed funds rate is versus where growth is coming in.
- We believe that the biggest risk by far is further escalation in the US-China trade war, which could further undermine business confidence and tighten financial conditions. Manufacturing globally has moved into contraction territory. Thankfully, services make up the bulk of developed market economies, and services have remained strong. In the US manufacturing is only 10% of US GDP.
- Historically, when the Fed cuts and the economy doesn't fall into recession, stocks, bond yields and the dollar rise. In a recessionary environment the opposite is true. We remain in the no recession camp, but risks are rising.
Fixed income: Bull vs. bear debate
Scott Dolan, Head of US Multi-Sector Fixed Income
Jonathan Gregory, Head of Fixed Income UK and Senior Portfolio Manager
The bull case for fixed income foresees a long period of low interest rates, while demand for fixed income investment remains strong, but what if the Fed refocuses its monetary regime away from targeting 2% inflation?
The bull case: Scott Dolan
Central banks dropped interest rates to historic lows during the Global Financial Crisis, but 10 years on they have stayed low, with almost USD 13 trillion in negative yielding assets in fixed income.
- The Fed does not want to re-engage in quantitative easing or non-traditional tools, and instead will likely be cutting rates in an effort to reach its 2% inflation target.
- The bull case is for a long period of low interest rates is clear as demand for fixed income investment remains strong from both pension funds and the retail investors while demographic trends and rising productivity may ultimately be powerful secular catalysts.
The bear case: Jonathan Gregory
While structural factors that have kept inflation low are likely to persist for at least the short term, and may even trend lower, the question is what happens after that.
- Monetary policy is not working as central banks intended. They have not met their inflation targets.
- The bear case is the Fed eventually changes course and decides to move to a regime where they will tolerate inflation running above the target for long periods of time to bring the overall price level back to 2% on average.
- Across developed markets low real growth rates may encourage governments to run bigger fiscal deficits also driving inflation expectations higher.
Trade war discussion
Geoffrey Wong, Head of Emerging Markets and Asia-Pacific Equities
Hayden Briscoe, Head of Fixed Income, Asia Pacific
The path of trade negotiations between the US and China, and other countries, remains hard to predict. We take a number of perspectives to triangulate on possible outcomes.
- Observed data: weakness in capex, especially in EM, as companies defer capex. Trade volumes have tapered but not collapsed. Perhaps some pre-ordering has occurred. Trade has been shifting away from China even before Trump.
- Economic modelling suggests a worst-case scenario of recession from late 2019 to late 2020 with growth resuming thereafter.
- Corporate survey data and on the ground research: Shifts to SE Asia, Mexico. Some Korean, Japanese and Taiwanese companies will re-shore from China to the home country. Majority of Asian companies to change supply chain significantly. Behavior varies by industry.
- Conclusion: the risks are concentrated over the next 12-24 months, as the suspension of capex is already having a dampening effect on the economy. The slowdown risks becoming a moderate-sized recession in the event of tariff escalation.