Winds of change for the global economy

THE world is seeing a divergence among developed countries due to slowing global growth and growing global disinflation.

While the US is tightening its monetary policies, the eurozone and Japan are easing theirs. This is being done in the face of cyclically low commodity prices, which are set to drag down inflation for the next five to 10 years, and a slowdown of growth in China. 

For the next five to 10 years we could see ourselves living in a world with low interest rates, unpegging currencies and high-valuation markets.

First of all, global growth will not be too high, with global gross domestic product from 2016-2020 forecast to be in the 3-4 per cent range.

Here is the reason for that:

Energy and commodities are a major source of consumption around the world, and as explained above commodity prices are cyclically low and could remain that way for up to 10 years, giving a drag-down effect on inflation. Moreover, China is becoming the world’s consumption engine, consuming around 18 per cent of the planet’s energy resources every year.

The slowdown in China consumption will result in a major drag on global growth. 

Focusing on the GDP breakdown – where GDP = C (consumption) + I (investment) + G (government spending) + (X-M) (net export) – the lower oil prices and the slowdown in China consumption, coupled with the losing competitiveness of the yuan, will have resulted in Germany and Russia’s economies taking a hit. This is because Germany and Russia have a larger portion of exports per GDP.

However, the US, which relies on domestic consumption and net imports, will still be on track for healthy growth.

The next trend for the global economy will see economies relying less on China consumption and using an array of tools to protect their currencies and terms of trade. Currencies will be unpegged against one another and we should also see a trend where governments boost spending and infrastructure projects to enhance global connectivity and lift demand.

Secondly, for the last decade global growth has been driven by leveraging with more debt, as we saw in the previous trend throughout the last decade when average household debt increased almost 20 per cent.

And currently most major developed countries are deleveraging since there is more risk in continuing to leverage. These are indicators for slow global growth. Moreover, lower commodity prices also carry the expectation of low interest rates.

Thirdly, the global population in 2020 is forecast to hit 7.7 billion, representing an average annual growth rate of only 1.37 per cent.

The slowdown in population growth and the ageing population due to the increase in life expectancy will also be a factor in the global economy being in a slowdown gear, with less consumption and a smaller labour force. In these circumstances, discount rates will push market valuations into a higher base. 

The market will be much more volatile, filled by various players including high frequency and algorithm trading. 

According to this “inconvenient truth”, focusing only on market regions or interesting industry sectors may not be the key for investors seeking returns over the next five to 10 years.

It might be the right time to review your portfolio and play an old traditional valuation game of stock picking, relying on a company’s fundamentals.

Investment contains risk. The investor should thoroughly study a prospectus, product features and return condition before investing.

 

This article was contributed by Asset Plus Fund Management.