US rate rises! UK rate rises?; Growth of the EZ: beware of bumps in the road; Solid Chinese loan demand could underpin further global economic growth; Finding the value in AIM; The Reflation Trade
US rate rises! UK rate rises?
Our expectation is that the Monetary Policy Committee will see the rise in inflation as a one-off spike. The retail sales volumes tell the story that wage growth is not spiralling up with inflation rise.The sterling move and its consequent inflation will lead to lower real growth, not higher; the process of slowing has begun a new cycle and the questions are probably “how weak can growth get and when does it trough?”.
The MPC’s post-referendum policy has been characterised as letting sterling take the strain. We think, if economic growth weakens as seems likely, the MPC will be happy to do so again. Don’t expect the MPC to follow the Fed.
Growth of the EZ: beware of bumps in the road
The latest survey of economic forecasts by the European Central Bank (ECB) revised up expectations of Eurozone (EZ) growth for 2017 by 0.1%, but there was no change to expectations for 2018 or for the longer term (to 2021). Real GDP growth expectations remain at 1.5% per annum for each calendar year from 2017 to 2019.
While the EZ is on a positive trajectory, the ECB’s accommodative monetary policy will be required for some time yet, and there may be other potential risks on the immediate horizon. For example, Greece’s continuing travails and the recent IMF/EU rescue package, as well as the challenges posed by Italy’s banking system (and general economic malaise), could both present problems further down the road.
Solid Chinese loan demand could underpin further global economic growth
We think that the solid loan and credit numbers from China this week suggest positive implications for further domestic investment, manufacturing sentiment, and upward pressure on commodity prices, equities and currencies.
As the ‘old economy’ ramps up, it is entirely possible that the resulting increase in demand for metals, such as copper and nickel, could push those markets into a deficit situation, and we expect that commodity prices could find further support in 2017 from these raw materials sensitive industries. As such, we believe that China will be a source of inflation (rather than deflation or lower prices) for the global economy in 2017 (as discussed in the article lower down), which can help support growth.
Finding the value in AIM
In our last piece, we noted the strength of large cap stocks over 2016, with the FTSE 100 returning 19.1%, while the small cap index returned 12.5%. This trend has started to see a reversal, with investors shifting more capital from large cap markets into small cap ones. This can be seen by looking at the returns from the FTSE AIM market of 15.9% and the small cap index of 9.6% over the last 6 months, compared to the FTSE 100’s return of 5.4% and the All-shares return of 5.5%.
The Reflation Trade
However, in our view, one of the most significant factors behind ‘the great reflation’ that some have taken to calling the past few months has been the bright picture coming out of China. The data on loan demands in China is looking positive, and it is this dynamic which could underpin solid growth throughout the world. Crucially, an important point to note is that China is now becoming a source for global inflation, rather than deflation.
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