“Mirroring the weather with its heat storms and cold fronts, there recently were marked temperature swings on the financial markets”, says LGT chief economist Dr. Alex Durrer in his editorial for LGT’s investor magazine and explains the consequences.
Geopolitical risks that were long ignored the wars and conflicts in Ukraine, Iraq and the Gaza Strip – repeatedly triggered tempests and local storm damage. Provided that these clashes do not proliferate further, their consequences on the real economy should remain limited, however, and they should not represent an increasing risk to markets – unless the spiraling of the generally destructive sanctions continues.
Meanwhile, following the recent bank rescue in Portugal, which almost seemed like an everyday, run-of-the-mill event, the debt crisis on both sides of the Atlantic is no longer considered as disturbing, even though clearly little structural improvement can be discerned in either the US or Europe. Instead, policymakers have simply found ingenious ways to put off the problem. Overall, however, the negative impact of all structural factors on the markets is no longer just bubbling beneath the surface but has turned somewhat more virulent again.
Against this backdrop the economic outlook for the global economy seems relatively unproblematic, although it is somewhat more divergent again, unfortunately. The cyclical recovery led by the US is continuing to strengthen, but the picture has only become brighter outside the eurozone. Nevertheless, the risk of falling back into recession remains limited – except to Europe. This is borne out by the relevant leading indicators, which, from the US to China and India, have stabilized well above the critical thresholds separating growth from recession. Whether and when the improved economy overseas and in Asia can pull the eurozone along with it remains unclear at present.
Accordingly, a monetary decoupling between the US/UK and Europe/Japan seems almost certain. The former have gradually been pricing in the first rate hikes, while the ECB and the Bank of Japan have been signaling further loosening. Of course, inflation and, even more importantly, inflation expectations continue to trend sideways, as opposing extreme forces (deflationary pressure due to the huge public debt versus the inflationary potential of ultra-expansive monetary conditions) have been neutralizing each other into an uneasy balance.
In our global baseline scenario, the global economy will become more divergent again, but staying on course overall – despite all the structural challenges and disruptive geopolitical factors. Inflationary potential is still being held in check by deflationary forces. In our risk scenario, the economy could slump again. The ageing, yet still robust, bull market is not likely to be spared the effects of temporary mood swings. The strategy team of LGT Capital Partners has nevertheless reaffirmed the quite "ambitious" tactical positioning of our portfolios, with only a slight reduction in the equity overweight. The positioning is based not only on economic fundamentals, but also on technical market factors.
More about the current economic conditions, an outlook and the LGT positioning you can find in the latest edition of the LGT investor magazine. Please go to LGT publications.
Due to legal restrictions you have to select your country of domicile before you can open the latest LGT Investorama under "Market information".