Article by Matthias Busuttil
We started off the year with a solid outlook on global economic growth and strong corporate earnings growth, combined with a tailwind of low unemployment rates and expansionary monetary and fiscal policies. Yet, the first quarter was marked with a spike in market volatility after a relatively calm 2017, leading to a reassessment of volatility expectations. Markets maintained a cautious tone throughout the second quarter of the year as politics has taken a more central role in influencing the outlook of the global economy, especially global trade, limiting any upside movement in risk assets.
European equities have just about managed to recoup the ground lost since the start of the year to reach breakeven from a low of -6.00 per cent in March, following the strong performance in Q2. US equities, on the other hand, were more resilient to the market rout in February, dropping to a low of - 3.30 per cent in February and returning +2.65 per cent over the first half of the year.
Emerging markets had a particularly rough first half of 2018, which was influenced largely by the strengthening US dollar, rising interest rates in the US, together with country-specific issues concerning politics and public debt. Both equities and bonds in emerging economies were the worst performers, returning -6.60 per cent and -5.23 per cent respectively in the first half of the year.
Performance in fixed income markets was generally negative. Despite the shift from an ultra-easy monetary policy towards the so-called ‘normalisation’, safe haven assets remained supported amid fears of political uncertainty across some major economies, allowing sovereign bonds to remain flat for the year while corporate market bonds lost value.
Global investment grade and high yield corporate bonds have also suffered from the rising risk premia across financial markets during this period, which led to the widening in credit spreads against benchmark bond yields. Investment grade and high yield corporate bonds returned -3.18 per cent and -2.53 per cent in the first half of 2018.
While the global economy has improved significantly over the past few years, especially when considering the decreasing level of unemployment across major economies, there is still some way to go to return back to normal inflation rates, growth rates and other economic indicators such as wage growth.
The big question is: what is normal? Or rather, what should be considered normal?
We are starting to experience, for the first time, the beginning of withdrawal symptoms, mainly in the form of the scheduled reduction in money supply following a long period of ‘super-easy’ monetary policy. This is particularly the case in the US where the Fed is already on the path of reducing the size of its balance sheet. In the euro area, on the other hand, the ECB finally indicated that it is expected to halt its monetary injection programme in December this year.
With a mildly positive growth outlook and persistently subdued inflation in selected major eco-nomies, the reduction of support from monetary policy needs to be compensated for with greater effort in other policy areas.
Governments have previously enjoyed and are still enjoying an extended period of low interest rates which has allowed them to refinance their books with cheaper, more sustainable debt. This in turn should allow them the space to place more emphasis on fiscal expansionary measures with the objective of securing long-term growth prospects and strengthening economic and political weaknesses.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.