Considering that we are now facing rather uncomfortable economic, financial and geo- political risks globally, dialling down the risk meter and moving into more liquid assets and sovereign bonds look increasingly tempting.
The International Monetary Fund (IMF) and World Bank just concluded their spring meetings in Washington this past week-end. Before the start of these sessions, the IMF released its latest World Economic Outlook last Tuesday. The Fund kept its forecast for global growth in 2015 at 3.5%. Key takeaways:
- Global growth is “moderate” but diverging. Growth potential globally is not expected to soon return to pre-2008 levels given aging populations and moribund private business investment.
- Spending and growth continues to be ham- strung by high debt levels. The IMF’s view is mirrored in Hoisington Management’s First Quarter 2015 Review & Outlook:
- “..when all major economies face severe debt overhangs, no one country is able to serve as the world’s engine of growth. This condition is as present today as it was in the 1920-30s.”
- …”the effect of high debt levels produced the clear result of diminished economic growth.”
- US Federal Reserve’s move to raise interest rates for the first time since 2006 could potentially roil financial markets. IMF Managing Director Christine Lagarde warned of evaporating market liquidity “if everyone rushes for the exit at the same time.”
- Global foreign exchange volatility has magnified as uncertainty swirls around the US Federal Reserve’s intentions.
- Lower oil prices have had an overall positive global impact but an unexpected rebound will hurt any gains made by consumers and businesses.
- A stronger US Dollar could inflict more pain on emerging markets holding US Dollar-denominated debt.
- Persistent low inflation. Low real and nominal interest rates could be here to stay for a while.
- Developed economies (US, Europe, China, Japan) need to boost financially sustainable potential output.
- Geopolitical tensions
The Group of 20 leading economies, who met on April 16th 2015, underscored the IMF’s concerns. They noted that “…global recovery continues but at a moderate and uneven pace.” However, the caveat is the potential for financial volatility risk as the US Federal Reserve prepares to hike interest rates. Other key risks mentioned:
- High levels of public debt;
- Foreign exchange volatility;
- Low inflation;
- Geopolitical tensions
This uneven, uninspiring, unsynchronized global economic backdrop leaves us unconvinced that equity market valuations in major economies are warranted. Moving down the risk meter to preserve what has been gained since the run-up in US equity markets started in 2012 is, in our view, a prudent strategy at this time. The on-going uncertainties globally makes us reluctant to chase capital gains from equity market investments. We prefer to deploy strategies that seek to generate a secure income stream until global excesses (particularly debt levels) are remedied. Increasing allocations to cash, investment grade sovereign bonds and physical gold (principally as insurance for geopolitical and black swan events) are key calls.