Who could blame investors for not knowing in which direction the global economy is heading? We started the year with glum predictions that the US, Europe and the emerging economies could face a recession this year as a trade war looked imminent.
Financial markets have so far generally ignored the trade war threats and recovered a good part of the losses incurred in the last quarter of 2018. At the time of writing, the S&P 500 shows gains of almost 14 per cent since the end of last year while the EURO STOXX 50 improved by almost 13 per cent.
However, investors and fund managers are still fretting on what could be in store for the global economy in the months to come. Most analysts are predicting that the Federal Reserve will cut interest rates this year to cushion the effects of a probable economic downturn in the US. US President Donald Trump will undoubtedly continue to use his hollow rhetoric to drum down interest rates as the 2020 presidential election approaches.
The situation in Europe is just as uncertain. The feared takeover of populist parties in European Parliament elections has not been as massive as expected. The messy Brexit situation in the UK has probably instilled some fear in people disillusioned with the way that the EU is managed to conclude that a bone-shaking ride on the EU train may be better than being left standing at the railway station.
The geopolitical risk emanating from poor political leadership in Europe may have diminished but do not expect any miracles to suddenly ensure that the EU will have the quality leadership that it needs to make the necessary reforms for long-term viability. EU economies will continue to show sluggish growth at best, and some of them may even enter into a recession. Some familiar faces of EU leaders will disappear in the coming months with the loss of Angela Merkel being the most likely to impact the already low quality of leadership in the EU.
Saving for a rainy day may seem illogical at a time when an economy is performing well
The trade war declared by Trump will continue to threaten investment. One has to see how China will react, and the escalation of trade sanctions and counter-sanctions is likely in the present confrontational phase. The sabre-rattling between Iran and the US could escalate into a much more significant geopolitical threat to stability on which global economic growth depends.
The changing of the guards at the ECB may diminish the willingness of the new leadership “to do whatever it takes” to save the euro. Low-interest rates are likely to persist, but this overused weapon is losing its sharpness and may not be very effective in dealing with another major financial crisis. Fiscal and economic reform remains in the crosshairs of EU political leaders. The fractious political set up at the top levels of EU institutions is unlikely to bring about the much-needed reforms.
Most analysts are still predicting that a recession is still on the cards in the US and the EU in the next 18 months irrespective of the added threats of a trade war. Investors and fund managers are devising strategies to hedge against these downturn risks by adopting conservative tactics. Cash and quasi cash investments remain a popular option even if many find it inconceivable to see their money not earning a return. Taking the long-term view on investment decisions can often be hindered by positive surges in financial markets in the short-term.
Those saving for their retirement should avoid behaving like traders buying and selling their shares and bonds impulsively on their rush interpretations of market developments. Drip investment is always an effective tactic as it spreads the risk of entering the market at the wrong time.
The long bulls market is due or a correction in the next several months. How intense and how quick this correction will come is impossible to predict. Political risks can erupt with little notice. Leadership weaknesses in Europe and the US are slow burning issues that will not be resolved in the coming few years. These risks add to the importance of prudence in trying to predict economic trends that will ultimately affect the value of financial assets.
Saving for a rainy day may seem illogical at a time when an economy is performing well. However, ‘gloom and boom’ can indeed coexist in the paradox situation we seem to be living in. Booms do not last forever, even if it is very tempting to believe that they do.