Economic Growth
A Chinese reflationary cycle is unfolding. Capital spending is showing signs of regained vigor, driven by both housing and infrastructure. Chinese PPI deflation will ease further. This will help reduce balance sheet stress of materials producers and boost overall industrial profits. Remain positive on Chinese investable stocks.
This week we are publishing a speech given by Chinese finance minister Lou Jiwei, which is highly relevant and informative in understanding the economic logic of Chinese leadership.
Near-term, global yields will remain depressed, but the structural forces suppressing yields should abate and even reverse in the long-run. Slower potential GDP growth - and lower commodity prices - will eventually shift from tailwind to headwind for bonds. Stepped-up efforts to increase inflation will boost long-term nominal yields; populist politics and calls to curb income inequality will amplify this trend. Long-term investors should stay neutral global bonds for now, but prepare to shift to a structural underweight beyond this decade.
The recent rebound is not a harbinger of a prolonged recovery in risk assets. The many potential negatives will keep volatility high and trigger further occasional selloffs.
This month's Special Report reviews the main factors driving the "lower for longer" bond yield view. A key finding is that the demographically-driven portion of the expansion in world capital spending has come to a virtual standstill, representing a major hit to underlying demand growth.
The deeply negative momentum in oil prices is fading, setting up the possibility of a counter-trend rebound in global inflation expectations and perhaps even the beaten-up U.S. High-Yield bond market.
The recovery in global risk assets and currencies is a temporary oversold bounce. It is not supported by signs that global growth is on the mend. Consequently, we are not willing to embrace more risk in our currency strategy just yet.
Markets see long-term global growth prospects as having deteriorated materially, with policymakers unwilling or unable to do much about it. Meanwhile, recent economic data - U.S. notably - hasn't been that bad. A divergence between what matters to Wall Street versus Main Street explains the disconnect. Accelerating wage growth, lower commodity prices, and cheaper rates are positives for households - but not for many Wall Street sectors. Stay neutral global equities. T-bonds are a "hold" for now. The dollar's selloff is overdone.