By Robert Marquardt, founder, chairman and co-head of investment management, Signet Capital Management
After the slowdown over the summer months, business surveys point to some stabilisation in activity, albeit at a lower level than at the start of the year. Global GDP is currently growing at little more than half the 3% rate recorded in 2011.
Within that global figure, the mature industrial economies are barely showing any growth in aggregate. Most of Europe and Japan are either in or on the cusp of recession. The drag on growth is caused by deep retrenchment in global manufacturing in China, Europe and Japan, while there is a bounce currently in the US. The US is holding up much better than other economies due to an accommodating fiscal policy. The ECB QE programme has steadied investor nerves but much must be agreed in Europe on the subjects of centralising the banking system, closer fiscal union and closer political integration. Risk of the eurozone collapse still remains, which is greatly affecting investor confidence. China’s slower growth will impact markets across the region. The recently announced infrastructure spending package will help to provide some renewed impetus to growth but it has to be remembered that much of the slowdown has been policy-driven and in part represents a necessary readjustment from an over-reliance on investment to more broad-based consumption. Moreover, it seems likely that, once the hand-over of power in the Politburo is completed by year end, the Chinese authorities will take further policy initiatives to support the economy should the cyclical downturn run too far. Nevertheless, given the excesses of the last stimulus programme, it is inevitable that greater caution will be applied this time around and China’s slower growth trajectory will continue to have a moderating influence on economic growth elsewhere in the region. ECB and Fed QE cause a tailwind for credit and equities and help cushion downside risk. This combination of central bank policies pushed credit spreads, equities and currencies to perform strongly. Credit and emerging markets were amply supported as the questionable growth outlook, combined with the prospect of continued low rates and further central bank liquidity, accentuated the search for yield and inflows into growing markets Looking forward, one can have a more constructive stance towards risk assets. The Fed’s move towards an easing bias is significant, as is the ECB’s continuing reduction of short-term financing pressures and systemic risk through their bond-buying programme. This continues to occur against a backdrop of underweight risk positions in investors’ accounts. The US, European and Asian bond markets continue to be characterised by a reach for yield. In the US the non-agency mortgage markets and subprime gains have out-performed every other asset class. China is still creating concern, however, though central bank support and the rally of financial asset prices are causing a rise in confidence in the emerging markets. In the zero interest rate policy world, we are in the early to middle stages of a debt deleveraging. It can be defined as one of subdued growth, excessively low rates, low volatility, limited proactive corporate action and a diminution of the tails. Well-researched high yield credit should be a major part of any investment solution in this environment.
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