Anthony Rayner
Premier Miton Macro Thematic Multi Asset Team
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Running in sync?
There were a number of decades when economies had become much more synchronised across the world. This was driven by economies becoming more integrated through globalisation, as well as an extended period when interest rates were very low across the world, as central banks looked to deal with the fallout from the Global Financial Crisis.
The level of interest rates, and the degree to which economies move in lockstep, can be compared to cross country running. Running on the flat, similar to low rates globally, there will be some difference evident between the fittest and the weakest runners but as they start to run up hill, the difference between the best and worst runners becomes ever more obvious. In short, low interest rates for economies, as with the flat for runners, are much more forgiving.
Dancing to a different beat
However, this is a very different environment we are faced with now. As the weeks go by, so it is becoming clearer that economies are dancing to different drumbeats. There is of course no single reason for this, while some reasons will be of a more temporary nature, such as the lockdown effects clearing on both the supply and demand sides, as well as the related fiscal and monetary support.
However, it is not just lockdown related measures that are reversing. The more structural dynamics that forced economies to become more synchronised are also reversing. Economies are becoming less integrated, as politics become more nationalistic, and trade wars become more commonplace.
In addition, interest rates have been increased materially, to more normal levels historically, and in a very short space of time. This contributes to a much less forgiving environment for economies, in a similar way as when the gradient steepens for runners, the more it illuminates the difference between the strong and the weak.
There is still evidence of economies being somewhat synchronised, for example headline consumer price inflation and producer price inflation is falling across many economies, while core inflation remains elevated in many countries.
However, where there is less synchronicity is in economic growth. Take the two biggest economies as examples: US growth is surprising on the upside while China is surprising on the downside.
Investing in technicolour
Indeed, this has implications for the expectations of the countries’ relative fiscal and monetary policy, the latter being particularly important for financial markets. Indeed, if economic growth divergence between countries ends up being sustained, or even if there is still some synchronicity but just with more lags, we should expect to see financial market performance diverge too.
In this environment, the world will be seen in glorious technicolour again, rather than monochrome, so genuine active multi asset managers will be rewarded, as they can discriminate more easily between the strong and the weak.
