Summary

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  • Since the middle of March, investors have become more pessimistic on the global growth outlook. This is reflected in a recovery in the price of the ten-year US Treasury note – a well-known ‘safe haven’ asset
  • To some extent, this change in mood has been driven by diminished expectations around the implementation of significant US fiscal stimulus and weak inflation readings across advanced economies
  • Despite this, our “Nowcast” indicator of current economic activity shows that global growth remains strong and synchronised. Furthermore, in major advanced economies, we have seen a significant broadening out of growth drivers, particularly into fixed investment spending
  • Also, leading indicators of investment growth in Europe, the US, and Japan look very strong. Given the age of the capital stock in advanced economies and continued decent corporate profits, this positive trend could run for a while
  • If the improvement in investment spending persists, it may have important implications for the “secular stagnation” view of a world of subdued investment demand, weak growth and low interest rates
  • Faster investment growth and the resurgence of aggregate demand it implies would create inflationary pressures, and rising real interest rates. This would support our existing strategic underweight in developed market government bonds
  • Meanwhile, the idea of fixed capital investment growth helping to sustain positive global economic momentum would support our strategic view of continuing to harvest the available equity premium, particularly in those markets with the best carry opportunity. At this juncture, Japanese equities look particularly attractive on this basis


This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination.

Introduction

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Since the middle of March, investors have become more pessimistic on the global growth outlook. This is reflected in a recovery in the price of the ten-year US Treasury note – a well-known ‘safe haven’ asset – having sold-off sharply following the election of Donald Trump as US President.

To some extent, this change in mood has been driven by diminished expectations around the implementation of significant US fiscal stimulus as a divided Republican Party struggles to progress with healthcare reform. This has also combined with weak inflation readings across advanced economies.

Growth fears and disinflation worries are part of the market psychology once again. Nevertheless, one interesting recent trend has been evidence of a pickup in investment in many major economies. In this Macro Insight we explore this development and assess what it could mean for our asset class views.

Signs of life in investment spending

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Although market perceptions around the growth outlook have deteriorated somewhat, our “Nowcast” indicator of current economic activity shows that global growth remains strong and synchronised (Figure 1).

Figure 1: Our “Nowcasts” of economic activity growth

Source: HSBC Global Asset Management as of 31 July 2017

Overall, we think global growth is tracking a touch above 3 per cent, broadly in line with US and European growth. Meanwhile in China, despite recent government efforts to rein in credit expansion, activity growth is comfortably above 6 per cent. For now, there seems to be little reason for concern. In fact, growth rates look impressive against conventional assumptions of what constitutes the “trend”.

What is also interesting is the source of this growth. In recent years, for most major developed market economies, household consumption has been the main growth driver, supported by consistent gains in the number of people in employment. The collapse in oil prices over 2014-15 also provided a significant boost to consumer spending as wage growth in real terms rose while headline inflation declined. However, in recent quarters we have seen a significant broadening out of the contributors to growth, particularly into fixed investment (spending on fixed assets, such as buildings or machinery). This is especially true for the eurozone (Figure 2).

Figure 2: Fixed investment contribution to GDP growth

Source: Bloomberg, Cabinet Office (Government of Japan) as of 31 July 2017

Furthermore, leading indicators of investment growth in Europe, the US, and Japan (based on data tracking orders of machinery) look very strong (Figure 3). Importantly, this is "hard data", and not surveys of how business people feel. And given the age of the capital stock in advanced economies and continued decent corporate profits, this positive trend could run for a while.

Figure 3: Factory orders data as a leading indicator of investment

Source: Bloomberg as of 31 July 2017

Rising investment spending may lower the risk of “secular stagnation”

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Perhaps the strength we are seeing in investment demand across advanced economies should not surprise us. After all the economic outlook has brightened since the middle of 2016. It seems reasonable that there is a feedback loop from better activity and upbeat “animal spirits” to spur business investment further on.

Furthermore, this strength in investment spending is important because, if sustained, it may reduce the risk of “secular stagnation”, where an excess of savings versus investment causes a decline in the equilibrium interest rate. This raises important implications for the trajectory of global central bank policy rates going forward.

Investment implications

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If this improvement in investment spending persists, it has important implications for the “secular stagnation” view of a world of highly subdued investment demand, weak growth and low interest rates. Faster investment growth and the resurgence of aggregate demand it implies would create inflationary pressures, and rising real interest rates. This would clearly support our existing strategic underweight in developed market government bonds.

Meanwhile, the idea of fixed capital investment growth helping to sustain positive global economic momentum would support our strategic view of continuing to harvest the available equity premium, particularly in those markets with the best carry opportunity. At this juncture, Japanese equities look particularly attractive on this basis.

If the investment spend is effectively allocated, a productivity spurt may also entail. This may help support higher wage growth – a sorely lacking feature in developed markets at present – in turn helping to reinforce household consumption, and therefore growth more generally.

For now, however, it is too early to call this the beginning of an “investment boom” or “productivity miracle”. Nevertheless, part of the challenge of investing is about being a "multiple scenario thinker", rather than just focusing on one single, consensus-based, view of the world. This highlights the need to be flexible and probabilistic in how we think about future macroeconomic scenarios.


Hussain Mehdi
Global Investment Strategy Team

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