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12 September 2018

Choose your narrative with care for 2019.

Trade, politics or tighter US monetary policy? One may have a light at the end of the tunnel

In the 10 years since the global financial crisis of 2007-2008 there has been a perennial fear that the withdrawal of central bank support would lead to a collapse in asset values, which had been artificially inflated by ultra-low interest rates and asset purchases. With equity markets outside the US now having fallen by 13% in US dollar terms since the peak in Q1 18 as US interest rates have risen, it is very easy to become convinced this is the start of something bigger. While experience is in general an advantage, investors should beware of the risk of being too quick to make emotive links with the run-up to the 2008 financial crisis and emerging market crises of the 1990s. Notwithstanding the recent market declines, when we look ahead into 2019 we can see scenarios which imply a continued, albeit slower, global GDP and profits expansion - and a pause or slowing in Fed rate increases.

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1 February 2018

Rising bond yields: Mini-drama perhaps, but not a crisis.

Rising yields a ‘known’ risk – declining economic momentum would be a bigger concern

This week’s modest declines in equity markets may be the largest of the last nine months but that is only an illustration of just how far equity market volatility has fallen. The narrative of rising bond yields and inflation expectations is being used to explain the market declines. This is understandable and we ourselves have previously highlighted the anomalously low level of global bond yields. However, rising yields are a known risk for 2018 and unlikely to create a major sell-off in equity markets by themselves. We would be more concerned if there was firm evidence of a meaningful slowdown in economic momentum. Such evidence is - for now - largely absent in either Europe, the US or China.

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21 September 2017

US rates: Has the fuse been lit?.

Conditions for synchronised, if gradual, tightening of policy appear in place

To our surprise yesterday’s Fed statement and projections not only re-confirmed the probability of a rate increase later in the year but also continue to forecast three further rate increases in 2018. Furthermore, the Fed announced the pace of reduction in its balance sheet which, while an initially modest US$10bn per month in October will rise to US$50bn per month by the end of 2018.  The initial market reaction has been for the yield curve to flatten further as investors price in an increased probability of a Q4 rate rate increase while US 10y bond yields rose by only 3bps. Equity markets may be sanguine for now but we view this monetary headwind as a slow-burn fuse which may challenge investors again during 2018.

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15 February 2017

Yellen’s hawkish testimony: Rate increases ahead.

The strong performance of asset prices in the post-2008 era remains in our view largely attributable to lower than expected growth rates being offset by much looser than expected monetary policy. However, as expressed recently by Bank of England Governor Mark Carney “..we’re coming to the last seconds of central bankers’ fifteen minutes of fame”. If, as we believe, central banks are in the early stages of stepping back from unconventional monetary policy this is likely to have significant implications for asset prices.

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17 March 2016

Was there a “plaza” accord after all?.

Yesterday’s FOMC statement and Yellen’s press comments were unequivocally more dovish than the markets and we were expecting. Going into the meeting there was a reasonable case for preparing the markets for a rate increase in early summer, given declining unemployment and increasing US core CPI. As it turned out, external factors – perhaps a euphemism for undesirable moves in global markets and the US dollar – were in contrast almost overplayed. For us, “Peak fear” was last month’s story, so why bring it up now?

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10 February 2016

Yellen’s testimony - No change to the Fed’s view.

If Fed chair Yellen’s speech today was an opportunity to communicate a more dovish outlook for US interest rates it has been passed up. Yellen highlighted the decline in the US unemployment rate to 4.9%, in-line with the Fed’s own longer-run estimate of a sustainable level and only talked of the uncertainty in regard to recent external factors and financial market movements – and notably to both the upside and downside. This gives little ammunition for bulls expecting a quick and wholesale reappraisal of the trajectory of US interest rates.

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*Multiple Sectors
27/09/2018
Equity strategy and market outlook - September 2018

In this month’s strategy piece, Alastair George believes that as investors turn to 2019, trade, populism and geopolitics will remain drivers of market volatility. However, the evidence from the US over the last 12 months shows that it is possible to gradually allow interest rates to rise without having adverse effects on financial markets or a reversal in the economy. With a stronger US dollar, emerging markets have underperformed but we have not yet seen the declines in earnings estimates or tightening of EM financial conditions which suggest a widespread crisis is around the corner. Ten years on from the global financial crisis, the unfortunate legacy may have been to transform a quantifiable private sector economic challenge into a much less well understood popular political movement on both sides of the Atlantic. In some respects the rise of the Brexit movement and the UK’s resulting political difficulties is just one example. We expect a Brexit risk premium to remain in place for UK assets until the political uncertainty has diminished. We retain a cautious position on developed market equities, due in our view to a continuation of the benign derating regime as profits grow while markets underperform traditional hurdle rates for equity investment of around 7-8% pa.

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