Global growth for 2017 is slated to improve for the first time in three years. This is the view of Richard F Lacaille, global chief investment officer at State Street Global Advisors.
This is expected to be the case despite the mixed signals coming out of the US economy, he says in his introduction to SSGA's new mid-year global market outlook. These have raised questions about whether we can still confidently speak of global reflation.
We have seen better-than-expected strength in the eurozone, Japan and China, he adds. This has set the stage to support risk assets for the remainder of the year. Global investors see the glass as half-full as US equities flirt with new highs.
Trump fiscal stimulus promise fades
As the promise of fiscal stimulus from the Trump administration fades, concerns over stretched valuations in US equities have prompted caution. This has led investors to look to the eurozone, Japan and select emerging markets, he says.
The elongated credit cycle continues to attract yield-hungry investors, as the 10-year US Treasury yield remains stubbornly low at around 2.2%. Even after the Federal Reserve’s second rate hike this year, the benchmark yield has declined.
This is weighing on global government bonds, he writes. The UK’s surprise hung parliament vote and darkening clouds over the Trump administration have put political risk back on the agenda, though markets seem remarkably complacent.
Safe havens scarce, quality opportunities the watchword
While safe havens are scarce, quality opportunities for income and growth remain the watchword for investors, with a careful eye kept on individual valuations.
The outlook for the global economy in the second half is characterised by a broad-based cyclical upswing offset by structural headwinds. Global growth is projected to accelerate to 3.4% this year, the best performance since 2014.
Growth in the eurozone, China and Japan has surprised to the upside, as recessions end in Russia and Brazil. President Michel Temer’s political woes, however, could threaten further needed reforms in the latter country.
Weakest links have strengthened
In general, the weakest links in the global economy chain have strengthened this year. Broad measures of global real activity have improved. World trade, industrial production and manufacturing activity have all rebounded.
Labour markets have strengthened. The end of the energy and commodities recession, even at current prices, is a favorable trend. Capital expenditure is bottoming out. Commodity exporters are doing better on stronger terms of trade.
At the same time, aging demographics and weak productivity continue to pose a structural drag on growth. Expectations for growth and inflation are the two most powerful forces on asset prices.
Inflation stubbornly low
Despite central banks’ best efforts since the global financial crisis, inflation remains stubbornly low in most advanced economies. Following a big step up in inflation in 2016 on higher oil prices, oil has dropped 20% since February.
Even with broad-based improvements in global growth, the cyclical upturn has not yet pushed core inflation higher. Good portfolio practices suggest every investor needs a measure of inflation or purchasing power protection.
However, given the muted inflation we expect to see for the foreseeable future, investors might want to consider real assets like real estate, which will provide not only protection but also growth and income.