Can we keep in step with synchronised global growth?

Bob Hair in pursuit of the old normal

Despite the age of austerity, political uncertainty and the emergence of a “new normal” where antiestablishment feeling is de rigueur, the global economy appears to be in relatively good shape.

We have now seen nearly eight consecutive years of growth since the end of the “great” recession with growth in developed and emerging markets both accelerating in 2017, the first time this has happened since 2010.

Even though there is concern about equity markets being too high, this backdrop of synchronised global growth should, in theory, be good for equity markets.

A consensus of analysts’ forecasts from Datastream and Cazenove Capital suggests that global earnings are expected to grow at about +14 per cent in 2017 and +10 per cent in 2018.

The establishment keeps delivering, as it were.

Ultimately, this has in no small part been aided by an unprecedented period of quantitative easing (QE) in the United States, UK, Europe and Japan.

Although we know the outline of the next chapter as the US Federal Reserve starts policy normalisation – which essentially means reversing QE with QT (quantitative tightening) instead it is unclear as to the impact on asset prices.

As extra liquidity in the market (ie banks lending money) is gradually removed, and interest rates are teased upwards – this could affect asset prices, particularly equities.

The good news is that financial conditions remain favourable which may limit the impact – in particular a weaker US dollar. This is positive for US inflation, growth and corporate earnings.

In addition, the inevitable post-hurricane rebuilding effort and boost to consumption could also help fuel growth in the US.

The European Central Bank and the Bank of England are also looking to tighten monetary policy. Here, savers should welcome policy normalisation if it also brings higher interest rates.

We may even benefit from being able to monitor the progress of QT from across the pond before this policy is actually adopted here, but if QT doesn’t work out as planned, well, as they say: “when the US sneezes, the rest of the world catches a cold”.

The good news is that financial conditions remain favourable