Post lull, positive economics
- Investors are returning from the northern summer lull. The global economy that greets them remains strong. For the first time since 2007, the world's major economies are enjoying simultaneous growth. In real terms, global trade is at a record share of GDP. The risk of a major economic downturn in the next eighteen months is very low. Proper economic data offers a positive mix. Employment is strong or stronger. Growth is around trend. Inflation is close to long-term averages.
- It is therefore no surprise that some central banks have changed their policy tone. In some economies, central bank policy (monetary or quantitative) is likely to gradually tighten. Elsewhere, the chances of central bank easing have fallen. Central banks are changing their bias because economic growth is improving, not because economic growth needs to slow.
- This economic picture has relatively clear implications for investors. Commodity prices should be supported by a good growth story. Equity earnings should be helped by consumer demand and moderate pricing power. Bond markets are unlikely to crash, but improving economics and central bank tightening should pressure yields to rise. While equity valuations may not be cheap, the underlying economics still offer a positive story.