- We’ve seen the market shift regimes where growth is heading sub-trend
- The lack of policy maker ammunition may trigger more unconventional policies
- This is a classic cyclical end game and markets may need to re-rate further
In asset allocation we use a market diamond approach to predict future economic expansion, connecting growth expectations which drive inflation, central bank policy, and market risk premia. There are feedback loops between all four of the quadrants of the diamond.
“We’ve just come out of the longest expansion in post war history, and the question for investors is timing and when it will come to an end”
When the output gap or the amount of spare capacity in the system has been used up, there is a risk that we’re going to move into a slowdown. Markets are likely going to continue to be correct, by pricing in that slowdown.
“Moving into a slowdown regime, investors are asking where things go next.”
The market has recently shifted regimes, from where growth was running above trend across G4 economies and developed markets, to where growth is heading sub trend. We predict that by the second half of 2019 markets will have adjusted to the second round effects, meaning that:
- Policy makers will become more dovish
- Investors will be leaning towards easing biases
- Risk free rates potentially starting to rally from there
The kind of problems and structural issues that are at root here are significant, and very hard to solve. We predict that issues are going to continue but the question is how deep and how hard?
For more information read Return Regime: We weren’t bearish enough
Head of International Research
Macro Strategy Research