How should you respond to the global economic slowdown?

17 May 2019 | Markets and Economy


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Commentary by Jonathan Lemco, PhD, principal and senior investment strategist in Vanguard Investment Strategy Group.

Key points:

  • US-China trade negotiations are both a risk and a potential silver lining for markets.
  • The US Fed says it is “patient,” but it’s also data-driven and will likely act when warranted.
  • Long-term investors should look beyond short-term developments.

I had the privilege of attending the International Monetary Fund’s spring meeting in Washington, D.C., last month. The key takeaway from the conference of leading global economists and monetary policy experts? Global growth is clearly slowing.

Having estimated 3.6% growth for 2018, the IMF in January forecast 3.5% growth for 2019. But at the meeting, it cut that projection to 3.3% – the lowest rate since the global financial crisis – amid signs that higher tariffs are restricting trade and a more challenging outlook for most developed economies.

It makes me wonder: Why do investors remain so bullish? And how should they position their portfolios? Although the IMF expects global economic growth to pick up during the second half of the year and reach 3.6% in 2020, such growth is by no means a certainty, as several key risks exist.

Global economic outlook: Lowest rate since the financial crisis

Alternative text for chart: The International Monetary Fund projects global economic growth to slow down to 3.3% in 2019, the lowest rate since the global financial crisis, before picking up in 2020 to 3.6%.

Source: International Monetary Fund.

Trade negotiation risks

The most serious risk is a collapse in trade negotiations between the United States and China. Many trade analysts believe that in two to three months we’ll see an announcement that a deal has been reached. But if talks stall, the result would be very bad for China and the markets that depend on it for their commodities exports.

The United States would also suffer. A breakdown in talks would harm agriculture and other economic sectors, while distracting from negotiations with Germany over autos and broader US-Canada-Mexico trade talks.

Another potential risk is that the US Federal Reserve will go back to raising interest rates. At the moment, the Fed has paused, having announced in March that it no longer planned any increases for 2019. It reiterated a “patient” approach this month. The signals we’re getting are that rates won’t go up until mid- to late 2020. But the Fed is data-driven, and should the data change, it might act sooner.

An earlier-than-expected rate hike would matter a lot. It would slow economic growth in the United States, which in turn would affect the rest of the world, given the United States’ status as the world’s largest economy.

Other potential risks include details of the Brexit finalization, which could be particularly harmful to the United Kingdom and, to a lesser extent, the European Union. Another concern is the growing debt burden of governments throughout the world, in particular, the United States. With a debt-to-GDP ratio approaching 100%, the United States owes about as much as it produces in a year.

Potential silver linings

So why do investors remain so bullish?

Part of the explanation lies in the generally stronger-than-expected growth and positive corporate earnings in the United States, as well as the bottoming out of an economic slowdown in China. But there are several other potential silver linings, including the potential for a US-China trade deal, which could boost markets. Even if it isn’t as comprehensive as market participants may anticipate, a completed deal offers important symbolic value. Also, the Fed’s pause on rate hikes will likely continue. (Some market watchers even anticipate a rate cut this year, given recently low US inflation.)

Of course, the markets are affected by multiple inputs. These are just a few of the factors that have led to investors’ mild bullishness in 2019. But rather than react to short-term market forecasts or the latest headlines, investors should remain focused on enduring principles that involve things they can control:

  • Set clear investment goals.
  • Ensure that portfolios are well-diversified across asset classes and regions.
  • Choose well-designed, low-cost investments.
  • Take a long-term view.

Investors with long-term goals should weigh views on policy uncertainty and market volatility only when deciding on their asset mix, including their ability to tolerate short-term losses. What’s most important is that investors who remain disciplined, diversified, and patient are more likely to be rewarded with fair inflation-adjusted returns over the long term.

In the end, short-term developments are less important to investors’ success than the big-picture trends that will shape markets in the years ahead.

Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

Other important information:

For professional investors only (as defined under the MiFID II Directive) investing for their own account (including management companies (fund of funds) and professional clients investing on behalf of their discretionary clients). Not to be distributed to the public.
It is for information purposes only and is not a recommendation or solicitation to buy or sell investments nor does it constitute legal, tax, or investment advice.

The opinions expressed in this presentation are those of individual speakers and may not be representative of Vanguard Asset Management, Limited.

Issued by Vanguard Asset Management, Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.


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