For New Zealand and the global economy as a whole, 2017 may be as good as it gets, especially if fiscal stimulus and protectionism cause inflation to rise in 2018, forcing a more aggressive tightening in monetary policy.
Australia should benefit from a continuation of the reflation trade, but investors should not get too excited given risks to the outlook, particularly protectionism from the Trump administration.
Change is in the air and the prospect for a bit of sunshine to break through the overhang of slow growth and lower-for-longer yields is palpable. Of course, the sun doesn’t shine forever, and overall our views are little changed. The things we have been worried about for some time—high valuations for certain risk assets, record-low interest rates, slow economic growth—have not gone away. The surest call to make for 2017 is that higher growth expectations will be paired with the distinct possibility of negative outcomes, putting a premium on diversification and liquidity management.
For now, bond yields and interest rates have probably hit their lows for this cycle, assuming fiscal stimulus across the developed world becomes a reality in 2017.
We expect further weakness in the British pound as uncertainty over the economic impact of “Brexit” drives the currency toward GBP/USD 1.15, and an even larger decline cannot be ruled out.
Despite its economic size, China remains under-represented in global investment benchmarks. Recently announced reforms have the potential to improve investor access and increase China’s weight in global benchmarks.
History implies there is more downside for the pound; we expect the currency to remain volatile and range bound as the long road to Brexit is just starting.
In this edition of CA Answers, two members of our Global Investment Research team discuss the recent sharp rally in emerging markets. Aaron Costello addresses the factors behind the rally and their sustainability, while Sean McLaughlin reviews the valuation case and return potential for emerging markets equities. Aaron Costello: In my view, the rebounds in…
Since December 2015, currency markets have become increasingly divergent, with the US dollar simultaneously weakening and strengthening against different currencies. To provide investors with a better understanding of how their base currency is performing, this chart book presents analysis of historical currency momentum, valuation, and fundamentals in five key base currencies: US dollar (USD), British pound (GBP), euro (EUR), Swiss franc (CHF), and Japanese yen (JPY).
The US dollar may remain under pressure in the near term, but we doubt the strong-dollar cycle is over.