Investment Desk Bulletin

17 November 2017

Still Dancing, But Closer To The Door

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By Pau Morilla-Giner

This week’s IDB takes stock of economic conditions and considers what the future may hold as Central Bank’s start to normalise monetary policy.

Economic data generally displays a synchronised cyclical pick up in global GDP growth, with advanced economy unemployment returning to pre-crisis levels.

In the US, consumer spending is being partially maintained by a drop in the savings rate, but there is evidence of wages gradually grinding higher. In Europe, the growth renaissance continues and consumer confidence points towards healthy future household spending.

Since the financial crisis, Central Bank balanced sheets have expanded by c$11tn, to the benefit of both bonds and equity markets. As these same Central Banks look to exit emergency policy and reduce the pace of asset purchases, we must consider the implications for asset returns and market volatility.

The post financial crisis policy mix of QE and fiscal austerity has driven financial asset valuations higher, but has had less success at delivering solid economic growth or boosting household incomes. The rise in wealth inequality has in turn been a catalyst for populism and protest votes against the establishment. As a consequence we should expect to the see the era of strict austerity come to an end.

The economic back drop and shifting policy outlook, require a vigilant and pragmatic approach to portfolio management. At London & Capital, we still believe income is king, because structurally we remain in a high debt and low growth environment.