The global macro trends are the most convergent and balanced they have been in years and keep steadily improving at the margin. Hence, Europe and the emerging markets are now more frequently and consistently outperforming. This fundamental backdrop helps investors to keep shrugging off technical warnings of big impending corrections, and should drive markets higher over time.
Last Wednesday, we held our monthly allocation review for March. Although the participants’ views were not uniform in nuance, they were highly compatible, and the strategy team’s conclusions were clear - we are staying the course:
On the macro front, the forward-looking purchasing managers’ indices (PMI) have admittedly started to diverge somewhat recently, rising to new multi-year highs in Europe and Japan, but stalling in the US, China, and the EM. However, all readings clearly remain in growth territory, which leaves a sufficient safety buffer on the downside. In addition, the preliminary readings for March (known as “Flash PMIs”) have started to perk up again in China and the EM.
The backward-looking data also improved modestly overall, backed by notable inflationary stimuli: the headline consumer price gauges jumped everywhere, exceeding the official target in the US and UK, and approaching it in the Eurozone and China. Naturally, that brought about talk that some central banks might bring forward their monetary tightening plans. The latter is most imminently true for the US Federal Reserve, which is now expected to raise interest rates by another 25 basis points next Wednesday.
That said, markets are not likely to become concerned about an undue policy tightening. In recent months, we have seen signs of current inflation, due to the oil price surge in the first half of 2016, and tightening labor markets for skilled workers. Expectations of future price gains have also risen on the back of a general political shift toward fiscal easing in most major economies, with last November’s US election providing a loud reminder of this trend.
Importantly, however, these developments have not nudged the major central banks to overdo it on the hawkish side, as some have done in the past. Against that background, this year’s market corrections have been brief and shallow, bond yields traded broadly sideways, and the USD recovered against most major currencies, after having given up some of its post-election gains in January (big corrections were limited to Brazil and Russia, where stocks had seen oversized gains of respectively 66% and 55% last year, in USD).
In that context, we warn against news headline-driven swings in perceptions of the Fed’s plans. Firstly, little has changed in the US policy rate outlook: investors still expect about three small hikes over the next year - thus, if the Fed were to hike next week, it is still expected to pause some other point in the near future. Secondly, gains in the underlying core inflation rates remain sluggish to non-existent, while short-term market expectations of rate hikes have tended to be very volatile. What really matters is that the global macro policy mix remains well-calibrated to support an acceleration of growth, without risking a lasting upsurge in inflation - as is the case at present.
Note: The next LGT Beacon will be published on 22 March 2017.