2018 Compelling Cash Alternatives - April 2018
How We View Global Market Conditions - April 2018
Global growth is currently in a sweet spot. Benefiting from a cyclical upturn in all major regions, it is running at its fastest rate since 2011. The question is: From where could the risk of a slowdown emanate? Could it stem from geopolitical risk, such as a looming trade war, or from the return of inflation, prompting a more rapid tightening of monetary policy?
The package of tax cuts, signed into law by US president Donald Trump, saw the Federal Reserve unveil a stronger growth forecast, lower unemployment during 2018 and 2019 and a more hawkish rate outlook at its most recent Federal Open Market Committee meeting. Having raised the Federal Funds rate on several occasions during the last year, the upper band of the range now sits at 1.75% (with the median projection of 2.125% at end-2018, 2.875% at end-2019 and 3.375% at end-2020). We don’t believe the eventual path will be quite as aggressive. Bond yields have begun to take notice, with short dated yields having risen 1% in the last six months. The US typically leads policy cycles, and the European Central Bank will likely follow the US by ending its asset purchase programme later this year. The combined decrease in asset purchases from central banks globally will be close to a trillion dollars over the next year. It is worth noting that since the start of the reduction in central bank asset purchases, markets have struggled to extend their gains and a rise in volatility should come as no surprise.
Credit spreads remain relatively tight but have begun to soften slightly under the weight of supply and a less supportive equity backdrop. More recently, US dollar liquidity has tightened as a result of changes to the US tax code and large amounts of pent up issuance from the US Treasury (following the resolution of the debt ceiling debate). This has led to a widening in US funding spreads, resulting in corporate bonds having underperformed government bonds in the first quarter of 2018 - the first time that this has happened since Q3 of 2015. We continue to see the risk to valuations linked more to changes in flows into the asset class as opposed to being solvency related.