For those looking for a balanced, rational, and insightful view of the global economy and outlook for financial markets, this article is worth reading.
I don’t normally post economic views on Kiwi Investor Blog as they are readily available. The quality of these views can also often be questioned.
It is also easier to find articles of doom and gloom, as they are more often promoted by the mainstream media, they attract more headlines.
This interview with Peter Berezin, of BCA, is the exception to the rule.
BCA’s Chief Global Strategist, Berezin, is not worried about the current weakness of the global industrial sector. If anything, he expects the global economy is going to see a revival in growth over the next few quarters.
As the article outlines “Falling interest rates and the service sector which is cooling but still expanding give Berezin grounds for optimism. He considers the trade dispute to be the greatest risk. But he believes that both the US and China have an interest in reaching a deal before the next US presidential elections.”
“Berezin prefers equities to bonds. In the longer term, he expects painful losses for the latter because central banks underestimate inflation risks……..”
I’ll quickly summarise Berezin’s thoughts below, nevertheless, the article is well worth reading so as to form your own view and to be informed.
In summary Berezin made the following comments and observations:
- He does not see the global economy heading for a recessions, as noted above if anything, he expects the global economy is going to see a revival in growth over the next few quarters. Financial conditions have eased significantly over the last six months largely due to the decline in government bond yields. Historically, easier financial conditions tended to translate into faster growth.
- Provided that the trade war doesn’t heat up significantly, the global manufacturing sector is going to rebound later this year. That’s going to drive global growth higher.
- He does not see any glaring imbalances in the US or globally that gives concern to a recession, noting the private sector globally is a net saver.
- The trade dispute between the US and China is the biggest risk to his view. China is stimulating their economy.
- He believes both parties have an incentive to cool things down – Trump so it does not do damage to the economy and his election changes. China – likewise so not to damage their economy, also they don’t like the prospect of negotiating trade if Trump does win the election and also if he doesn’t win the election – the Democrats are likely to be tougher on trade than Trump.
The above provides a taste, the article also covers the outlook for oil, inflation, and risk of regulatory impact on the large US technology companies.
What should investors do?
Berezin recommends investors to overweight equities relative to government bonds over the next 12 months. “Stocks are not particularly cheap, but they are certainly not very expensive either. The MSCI All Country World Index is trading at around 15.5 times forward earnings which is not too bad. Outside the US, stocks are trading at close to 13.5 forward earnings which is actually pretty cheap.”
Looking forward, his preferred regions are away from the US and towards the emerging markets and Europe. This is subject to a pickup in the global economy.
In relation to Fixed Income (bonds), he sees “an environment in which government bond yields are rising”. This is a negative environment for bonds (as yields rise, bond prices fall).
It is worth noting that 2019 is turning out to be good year for investors, particularly those invested in a “Balanced Portfolio”, 60% Equities and 40% Fixed Income. Global equities have returned around 18% since 31 December 2018, likewise returns on New Zealand and Global Bonds have been around 8-10%. This follows a very hard year in 2018 in which to generate investment returns, with the possible exception of New Zealand equities.
Returns on a one year basis include sharp declines in global equity markets over the final three months of 2018. These negative returns will start to “unwind” out of annual returns so long as equity markets remain at current levels.
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