Despite recent market corrections, the world economy is in good shape with a US recession unlikely to happen in 2019 or 2020 as many have predicted, accordin to analysis from BMO Global Asset Management.
The 2018 Global Investment Forum report stated that although a slowdown in US growth is inevitable given the hectic pace at which the economy has expanded this year, the rise of intangibles, assets such as goodwill, brand recognition and intellectual property that are not physical in nature, means that supply can respond rapidly to strong demand without putting pressure on inflation.
The global economic upswing has been long but shallow and inflationary pressures remain subdued which creates a fertile environment for risk assets.
Equities are expected to perform reasonably well, with corporate earnings continuing to grow, but even against the headwind of rising interest rates, government bonds and corporate credit, they may be vulnerable as central bank stimulus is wound down, the report says.
However, there are clouds on the horizon with the US Fed and other central banks raising interest rates, and the escalating trade war between America and China.
In terms of the UK financial markets, which are highly sensitive to Brexit headlines, the Global Investment Forum report concluded that, with some sort of deal being in the interests of both the UK and the 27 countries of the European Union, a deal is not certain but is a most likely scenario.
This would likely cause a significant rise in sterling, reducing the sterling value of UK companies’ foreign earnings which could therefore see the FTSE 100 weaken in this otherwise positive scenario.
Additionally the report showed that growth in Europe has been disappointing this year, but the Eurozone is still growing at an above-trend rate with unemployment falling and deflation no longer a threat.
This means that the European Central Bank (ECB) can finally start to prevent the region off monetary support by ending its asset purchase programme at the end of this year and slowly start to raise interest rates from their negative level, probably sometime in the second half of 2019.
While there are short term challenges in emerging markets, such as the function of trade war concerns, political problems, a stronger US dollar and rising US interest rates, BMO Global Asset Management established that these markets offer tremendous investment opportunities in the longer term. The demographics are attractive and the ability to use technology to grow in areas of education, finance and agriculture is enabling global growth.
There is, nevertheless, an opportunity for governance improvements to make emerging markets more resilient to financial downturns, whilst enhancing the efficiency of their stock markets.
Furthermore, BMO Global Asset Management viewed that global trade wars will have a limited impact on the world economy. Chinese companies look set to be the most affected, but its exports to America are a small share of GDP and will be diverted to other markets, especially if the 25 percent tariff goes ahead.
The recent trade deal between America, Canada and Mexico supports the view that the Trump administration does not want a full-scale trade war, but is focusing on China.