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Global economic growth is returning to pre-crisis levels. Europe and Asia show the most notable positive surprises. This is the view of Guy Wagner, Chief Investment Officer at BLI - Banque de Luxembourg Investments, and his team, in their monthly analysis, ‘Highlights’.
Global economic growth is returning to pre-crisis levels. According to International Monetary Fund (IMF) estimates, global GDP increased by 3.7% in 2017, compared to 3.2% in the previous year. The economic improvement is evident in all regions, with Europe and Asia posting the most notable positive surprises. “In the eurozone, the gross domestic product increased by 2.5% over full-year 2017”, says Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI - Banque de Luxembourg Investments. “It is its highest rate of growth since 2007. Japan has seen its longest period of growth for 16 years. In China, GDP increased by 6.8% in 2017, in line with the government’s target of annual growth.”
Despite economic growth, inflationary pressures remain low
Despite the improvement in economic growth, inflationary pressures remain low. In December, inflation in the United States and in the eurozone dropped slightly. In line with expectations, the US Federal Reserve left its key interest rate unchanged at the last monetary policy committee (FOMC) meeting chaired by Janet Yellen at the end of January. The monetary authorities have high hopes of inflation climbing this year to stabilise around the 2% target in the medium term. Expectations of higher inflation have ramped up the probability of an interest rate hike at the FOMC’s next meeting in March, which will be chaired for the first time by Jerome Powell, Janet Yellen’s successor as head of the Federal Reserve. In Europe, the European Central Bank (ECB) has kept its monetary policy unchanged. At the press conference following the meeting of the Governing Council, Mario Draghi restated yet again that interest rates would remain at their present levels for an extended period of time, and well past the horizon set for the net asset purchases. He explicitly said that interest rates were unlikely to increase in 2018 in view of inflationary pressures remaining contained.
Bond markets still hold little appeal
In January, US and German bond yields rose sharply. In the United States, the prospects of the economy accelerating, at the expense of a further worsening of the budget deficit following the recent tax reform, have driven up the yield on the 10-year Treasury bond on the highest level for three years. In the eurozone, the yield on the German 10-year government bond followed the US trend and rose, too. In contrast, the bond markets in the European periphery countries were in good heart, with the 10-year yield remaining unchanged in Italy and declining slightly in Spain. “Generally speaking, the bond markets still hold little appeal”, according to the Luxembourgish economist. “In the eurozone, the yields on offer are still very low, while the higher yields offered by US Treasuries are in danger of being eroded by the weakness of the dollar. “
Rise in long-dated yields is the main risk for ongoing rally
In January, equities continued 2017’s favourable trajectory. In local currencies, the indices S&P 500 (+5.6%), the Stoxx 600 (+1.6%), the Topix (+1%) and the MSCI Emerging Markets (+8.3%, in USD) posted further gains. “The best equity market performances were once again posted by technology stocks, followed by the financial sector, while defensives trailed behind. In the short term, a rise in long-dated yields is the main risk for the ongoing rally on the equity markets, where valuation levels have become very high. However, in view of the lack of alternatives, a scenario in which already-expensive equities become even more expensive cannot be ruled out”, concludes Guy Wagner.
