Why investors should not ignore global 'fault lines'

CEO issues reminder that weakening economic conditions underlines Fed’s decision to back off raising interest rates

Why investors should not ignore global 'fault lines'

The economic fault lines in Europe, China and the US should ensure investors remain cautious over the next few months, according to leading industry CEO.

Kevin McCreadie, also chief investment officer at AGF Management Ltd, said that the US Federal Reserve’s decision to halt its interest rate-raising policy for at least the rest of 2019 is not a signal for investors to relax and overplay their hand.

He said: “Investors must not forget that weakening economic conditions are behind the central bank’s decision to pause. While many believe we have entered a new ‘Goldilocks’ period for stocks, the environment may not feel so right if the global economy continues to worsen and moves closer to recession in the weeks ahead.”

He said that nowhere is this downturn more evident than in Europe and, in particular, Germany, the EU’s biggest economy. Its steep decline in industrial production and its manufacturing sector is now in contraction and Germany’s growth forecast has been downgraded from 1.9% to 0.8%.

McCreadie said: “In part, Germany’s economic woes are self-inflicted and relate to its struggling automotive industry. However, China’s recent slowdown is also playing a role and, more importantly, so too is Britain’s tumultuous and yet unresolved plan to exit the EU.

“Brexit has also taken a toll on both the French and United Kingdom’s economies and matters could get even worse in the case of a hard Brexit, whereby Britain leaves the EU without an agreement. Perhaps the best case scenario is a prolonged extension to the current departure deadline on April 12. But even then, it’s hard to see what would breathe much life into Europe’s economy at this late stage in the cycle.

“Unlike the Fed, the European Central Bank hasn’t been able to lift deposit rates out of negative territory to date and it has limited means of stimulus at its disposal.”

The cracks in the economy are also evident with the two heavyweights – US and China. While the US can at least point to strong employment and low inflation, the stimulus from President Donald Trump’s corporate tax cuts is waning and there are continued trade headwinds with China.

He said: “The Chinese economy is also beholden to a resolution with its largest trading partner, but may be in better shape to right its recent slowdown. The country has initiated another massive stimulus program that is starting to pay off, according to a Bloomberg Economic gauge that shows rising confidence in the outlook from investors, small businesses and sales managers.

“To be clear, we still think all three of the world’s economic powerhouses can grow modestly and do not anticipate a global recession this year. But the fault lines that currently exist in Europe, China and the US cannot be ignored by investors and, given how strong equity markets have been of late, we’re most comfortable taking a cautious approach to stocks over the next few months.”

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