Quarter 3 of 2017 was another positive period for risk assets with growth of between 2% and 4% in most global equity markets. Government bonds [Gilts] fell in September resulting in a loss for the quarter.
The quarter saw modest global growth that surprisingly came from all regions. The Manufacturing Purchasing Managers Indices [PMIs] and global trade data suggest that growth will continue with US growth likely to see increased momentum.
Much of the push behind global growth was provided by Central Banks’ quantitative easing programmes and low interest rates. Central Banks now appear to be moving towards removing that support with the ECB having reduced its bond buying programme and the Bank of Japan and Bank of England likely to follow suit. The US Feb will likely increase interest rates shortly and begin reducing its balance sheet. Increasing interest rates will be bad for equities and once the trend is established, investors are likely to begin taking profits by selling equities and to hold more of their investments in cash or bonds.
Inflation has remained low despite temporary increases in energy prices and this might be due to commodity price normalisation. Foreign worker flows into the US and UK and even the Eurozone have reduced and this is likely to result in higher wages and feed through into higher inflation.
Structural reforms remain gradual and incremental and most countries seem now to have abandoned austerity policies. However, the high public debt to GDP ratio together with higher interest rates will make debt servicing burdensome for many countries.
Sovereign bonds yields are expected to be higher and to return to more normal levels. Equities will benefit from rising nominal GDP and from higher corporate earnings.
A look at the positioning of fund managers portfolios shows us they are overweight in International equities including North America; Europe, excluding the UK and Japan. They are also seeking to increase their exposure to Corporate Bonds and cash. Their least favoured sectors now are Government Bonds, Property and Hedge Funds/Absolute Returns.