Before the UK’s decision to leave the European Union (EU), the global economy was experiencing a deep structural transition. A more sustained and balanced economy was still achievable, despite low growth and low inflation during this process. However, with new uncertainty in Europe post-UK referendum, we have downgraded our global growth outlook for 2016 and 2017. Although we still think the world economy can avoid major disruption, we are less confident than before. We believe that the global economy will remain in a prolonged period of low growth and low inflation, with a risk of political paralysis.
Post-Brexit Uncertainty Alters Our Global Growth Outlook
GDP Growth (YoY %)
Sources: Pioneer Investments, CEIC, as of July 15, 2016.
Marco Pirondini is Head of Equities, US and Portfolio Manager of global equity strategies.
Equity performance this year has been driven by a flight to income in a post-Brexit, low interest rate, low growth environment. As a result, sectors that have an income focus, such as utilities and telecommunications, have been among the top-performing this year. In addition, energy has done well due to a rebound in oil and natural gas prices.
Global Equity Performance
MSCI All Country World Index – YTD Sector Performance
Source: MSCI – data as of July 25, 2016. Past performance does not guarantee and is not indicative of future results Continue reading
The European Central Bank’s (ECB) Governing Council met today, marking the first of a series of high profile meetings scheduled over the next few days (the Federal Open Market Committee (FOMC) meeting on July 27th, the Bank of Japan (BoJ) meeting on July 29th, Bank of England (BoE) on August 4th), which have become a strong focus for investors globally.
1. ECB Minutes – “Never Mind the Quality, Feel the Width”
A UK sitcom aired in the late 1960’s, featuring two tailors, with the above title. The reference was to one tailor’s assertion that quantity was more important than quality. There was an air of this phrase about the minutes of the ECB’s meeting on June 2nd, released last week. As expected, the minutes contained no major surprises. But closer inspection revealed an interesting snippet on one of the market’s hot topics – the “capital key” component of the ECB’s bond-buying programme. You may remember in last week’s blog we noted the speculation that the ECB might switch their bond buying from being based on countries’ capital keys to a ratio based on market-capitalisation. This would be a big advantage to Italy, who have the highest weighting in Euro sovereign bond indices as a result of the large amount of Italian sovereign debt outstanding. Those rumours were quickly dispelled by EU and ECB sources early last week, but the ECB minutes showed that the topic has been discussed at general council level. The key paragraph was as follows : “…as regards the asset purchase programme, a continued smooth implementation could be observed overall, although a remark was made that markets appeared to foresee future challenges in sourcing sufficient volumes of public bonds for some jurisdictions under the present limits, which could contribute to increased price volatility…it was pointed out that, if assets were indeed close substitutes, it should not matter much which precise assets were being purchased under the asset purchase programme, but rather the overall purchase volume and associated money creation”. So that is the ECB telling us that they are not so worried about the exact composition of the bond buying, but rather the overall bigger picture. If that means the capital key rules have to bend a bit, so be it. We continue to believe that some formal change to bond-buying programme rules will be made at coming meetings that will address the current concerns about country limits.
Paresh Upadhyaya is Director of Currency Strategy, U.S. at Pioneer Investments.
The UK’s vote to leave the EU will have global economic and financial consequences. During the initial days of uncertainty, global financial markets sold off sharply as markets were determining whether Brexit was a regional or global shock to the world economy. The indications so far are that this should be a regional shock contained within the UK/Europe area and, as a result, global financial markets are so far successfully riding out temporary volatility. Continue reading