Three labour trends keeping a constructive backdrop for markets

In the normal course of events, synchronised growth in activity at the rate we have been seeing across the globe would be accompanied by a clear increase in inflationary pressure that would, as a result, require an increase in interest rates significant enough to hold back risk-asset performance.

That clearly isn’t happening yet. Indeed, the latest inflation levels recorded in key developed economies and the BRICs (Brazil, Russia, India and China) are either not at central bank target rates/ranges, or are not a significant threat to them.

Trends in labour markets around the globe have led to more female, older, self-employed and part-time workers being drawn into labour markets, which in turn has resulted in wage growth that has been far more muted than expected.

At this point in time, we see no reason why more women, for example, cannot be drawn into, say, the US labour market. We can also see no reason why part-time self-employment shouldn’t continue to grow as a percent of total employment.

The big question then, is whether or not these constructive conditions of good growth with limited inflationary pressure can persist…

Steve Waddington – fund manager. Insight Investment, a BNY Mellon company

In the normal course of events, synchronised growth in activity at the rate we have been seeing across the globe would be accompanied by a clear increase in inflationary pressure that would, as a result, require an increase in interest rates significant enough to hold back risk-asset performance. That clearly isn’t happening yet. Indeed, the latest inflation levels recorded in … read more

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High yield in 2018: Will we see more rising stars than fallen angels?

When global growth strengthens credit dynamics generally improve, especially for those most sensitive to the economic cycle. For high yield investors this creates an important investment theme as established companies get upgraded, causing the spreads of their debt relative to government bonds to tighten, presenting new opportunities.

In 2015 and 2016, companies in the oil and gas, and mining, sectors were affected particularly badly, but this turned around as commodity prices stabilised and then started to rise. Companies that controlled costs and paid down debt have since benefited. If the momentum in the global economy continues into 2018, then this powerful technical dynamic within the high yield market should continue.

Uli Gerhard – portfolio manager. Insight Investment, a BNY Mellon company

When global growth strengthens credit dynamics generally improve, especially for those most sensitive to the economic cycle. For high yield investors this creates an important investment theme as established companies get upgraded, causing the spreads of their debt relative to government bonds to tighten, presenting new opportunities. In 2015 and 2016, companies in the oil and gas, and mining, sectors … read more

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Out with the old: shocking stats on the need for a US infrastructure boost

The devastating impact of the 2017 US hurricane season raised timely questions about US national infrastructure in the face of an increasingly uncertain climate. Hurricane damage in southern states, such as Florida and Texas, shone a spotlight on the resilience of key utilities, such as power grids, and highlighted the need to improve safety after decades of under investment in transportation, public buildings, water treatment systems and other forms of vital infrastructure.

Infrastructure renewal was a cornerstone of President Donald Trump’s election campaign but also has almost universal support politically, and we believe much can be achieved. We are particularly positive about the potential to develop new energy infrastructure thanks to the growth in shale energy extraction. The sector faced significant financial pressures from 2014 to 2015 but we think oil and gas pipeline companies can now regroup and drive ahead with major new projects.

Brock Campbell – portfolio manager. The Boston Company Asset Management, a BNY Mellon company

The devastating impact of the 2017 US hurricane season raised timely questions about US national infrastructure in the face of an increasingly uncertain climate. Hurricane damage in southern states, such as Florida and Texas, shone a spotlight on the resilience of key utilities, such as power grids, and highlighted the need to improve safety after decades of under investment in … read more

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Against the grain: Which emerging market’s fund industry grew 50% in a year?

Historically, some 30% of Indian GDP has been in savings – typically gold and property – but demonetisation in November 2016 and the Aadhaar scheme are, together, encouraging these savings into the financial system. Moreover, this environment of plentiful liquidity is driving down funding costs for lenders and spurring the fees of businesses related to asset management.

Around 60,000 mutual fund accounts are being opened every day in India, and Indian mutual funds have almost doubled their assets under management (AUM) in just over three years.

The Indian mutual funds market has gone through three distinct phases over the past 13 years, with compound annual growth rates (CAGR) improving markedly over the past three years, on the back of higher market returns and stronger flows following demonetisation last November.

Given that the penetration of mutual funds in India as a proportion of GDP is less than a quarter of the global average, and below that of many other emerging markets, we believe there is a long ‘runway’ for growth in this area.

Sophia Whitbread – portfolio manager on the Newton Emerging and Asian Equities team. Newton, a BNY Mellon company.

Historically, some 30% of Indian GDP has been in savings – typically gold and property – but demonetisation in November 2016 and the Aadhaar scheme are, together, encouraging these savings into the financial system. Moreover, this environment of plentiful liquidity is driving down funding costs for lenders and spurring the fees of businesses related to asset management. Around 60,000 mutual … read more

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In emerging markets, managing foreign exchange risk is critical

One major change in recent years is how policy makers in many emerging markets have become comfortable with using currency as a buffer to insulate their economies from negative shocks. Among the first lines of defence against any political, economic or external shock is to allow currency weakness, with authorities only stepping in to counter falls once they become significant enough for inflation pass-through to become a concern. As such, management of currency risk in order to control volatility and avoid potential losses has become even more important.

Colm McDonagh – head of EM fixed income. Insight investment, a BNY Mellon company

One major change in recent years is how policy makers in many emerging markets have become comfortable with using currency as a buffer to insulate their economies from negative shocks. Among the first lines of defence against any political, economic or external shock is to allow currency weakness, with authorities only stepping in to counter falls once they become significant … read more

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New Year, clean slate? Why 2018 will be the year of investing in renewables

The transition to green energy is accelerating, with 2018 expected to deliver new investment opportunities as technological innovation and falling costs drive further momentum for change.

What started as a government-subsidised process to decarbonise the power sector is now shifting to a process driven by expenditure and economics. Over the next 12 months, as the cost of clean technology continues to fall, we expect to see an acceleration in investment, in both developed economies and fast-growing industrialising nations.

Against this backdrop, the ability of renewables to deliver what we think are stable and sustainable income streams, means they are likely to remain an attractive source of dividends and total returns.

For a full article on the renewables revolution, visit our Markets 2018 website.

Paul Flood – fund manager and strategist. Newton, a BNY Mellon company

The transition to green energy is accelerating, with 2018 expected to deliver new investment opportunities as technological innovation and falling costs drive further momentum for change. What started as a government-subsidised process to decarbonise the power sector is now shifting to a process driven by expenditure and economics. Over the next 12 months, as the cost of clean technology continues … read more

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Top of the Pops: What will be the market’s Christmas No.1?

Just when you thought risky assets could not go any higher or quantitative easing any better, welcome to 2017: the year of the relief rally. The year when asset returns made the TMT bubble of 2000 lore palatable if not possible. Among the cornucopia of rising risk assets, which one will end the year on top?

We might have the tried and true US Equities. A bit like Mariah Carey’s “All I Want for Christmas Is You”, this one’s an easy crowd pleaser. While maintaining historically high margins of nearly 10%, US S&P 500 earnings have grown 10.4% through Q3 2017[1] and are expected to grow slightly higher in 2018 with the majority of earnings growth coming from the IT sector.

Or alternatively, the Christmas number one could go to an asset class coming in from the shadows, like EM equities: a bit like the comeback of Wham’s “Last Christmas”, one of this year’s favourites in homage to George Michael. The last calendar year MSCI EM equities topped the asset class charts was 2009.

Normally the winner of X Factor does well on the Christmas list. This year’s contender is Rak-Su and give it to me or “Demelo”. The market wanted inflation and a strong USD in 2017 but got neither of them in spades. Not surprisingly, with negative real rates, cash is a strong contender for worst asset class of 2017. Holding onto cash in most major currencies would have lost you money in real terms. The Zero Lower Bound (ZLB) turned out to not be a lower bound after all with negative short-term nominal rates in Japan, Europe, Sweden, Switzerland and Denmark during 2017.

The odds on favourite for this year’s Christmas number one is Ed Sheeran’s remix with Beyoncé of “Perfect”. And our Christmas chart wouldn’t be complete without the perfect asset class stocking stuffer, the bitcoin. According to COINBT:SS the lead crypto currency is up 1,575% year-to-date.

Stormzy’s “Blinded by Your Grace” might apply to the impact of currency if you valued your assets in US dollar rather than sterling in 2017.  Based on the negative sentiment in the options market, the historic trade deficit and/or stubborn fiscal deficit the GBP lost nearly 10% against the USD. Despite a formal end to QE and the first serious Federal Reserve rate rises since 2006, the USD surprised the market and lost nearly 10% of its value over the year. [2] So to hedge or not currency hedge became a serious question again for investors.

Jason Lejonvarn – Investment strategist, Mellon Capital

[1] Bloomberg, as at 30 September 2017

[2] Bloomberg YTD as at 13 December

Just when you thought risky assets could not go any higher or quantitative easing any better, welcome to 2017: the year of the relief rally. The year when asset returns made the TMT bubble of 2000 lore palatable if not possible. Among the cornucopia of rising risk assets, which one will end the year on top? We might have the … read more

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The comeback king: Shinzo Abe and Japan’s reinvigorated economy

Between 2006 and 2012, Japan had no less than seven prime ministers; more than one a year. November’s landslide election of Shinzo Abe for a record-breaking third term signals a decisive end to an era of political instability and bodes well for a reinvigorated economy.

Immediately after Abe’s recent victory , the Nikkei 225 hit a 21-year high, building on a run that saw Japanese equities comfortably outperform European and US stock markets since the start of September.

On the macroeconomic front, too, the picture looks rosy. Corporate profits and business sentiment are up. GDP has risen for seven quarters in a row, its longest spell of interrupted growth for 16 years. Nominal GDP was almost 11% higher in the third quarter of 2017 than it was five years earlier.  We see this spurt of growth as a major milestone. For the first time since 1997, nominal GDP is now above ¥533 trillion, meaning the economy has finally recovered the ground lost over two long decades of stagnation.

If you step back and look at what the government promised on the economy and what it has actually achieved since it launched fiscal and monetary stimulus in 2013, it’s pretty impressive. We think it points the way to a positive outlook for investors.

Miyuki Kashima – head of Japanese equity investment, BNY Mellon Japan

Between 2006 and 2012, Japan had no less than seven prime ministers; more than one a year. November’s landslide election of Shinzo Abe for a record-breaking third term signals a decisive end to an era of political instability and bodes well for a reinvigorated economy. Immediately after Abe’s recent victory , the Nikkei 225 hit a 21-year high, building on … read more

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Bitcoin gains new ground

Despite initial controversy, more and more major companies and payments systems are starting to accept Bitcoin as a valid currency. The advantage of Bitcoin is that it is seen as being a currency that is finite in nature which cannot be manipulated by central bank policy politics. With Bitcoin you can’t just print money out of nowhere – it is tethered to a finite resource, as the ability to ‘mine’ it is designed to resemble a precious metal such as gold. In this regard it seeks to replicate the approach to currency typified by the gold standard.

Paul Markham – global equities manager. Newton, a BNY Mellon company

Despite initial controversy, more and more major companies and payments systems are starting to accept Bitcoin as a valid currency. The advantage of Bitcoin is that it is seen as being a currency that is finite in nature which cannot be manipulated by central bank policy politics. With Bitcoin you can’t just print money out of nowhere – it is … read more

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Could the globalisation elephant begin a stampede to protectionism?

Popularly known as the globalisation elephant thanks to its shape, the chart above describes how, between 1988 and 2008 the real incomes of both the world’s richest and poorest people soared. In contrast, lower earners in developed countries saw their real incomes fall. Since then, the global financial crisis and its aftermath have seen average worker real incomes in much of the developed world stagnate. In the UK, average weekly earnings are still significantly (7.7%) below their 2008 peak in inflation-adjusted terms.

We think the chart helps explain why populist politics have taken root in developed markets. If you’re part of that ‘squeezed middle’, globalisation is likely to have been less a force for good and more a source of anxiety over the past three decades. No surprise, then, if people have turned to new political voices in search of solutions. Certainly in the US, President Trump has made clear his desire to put America first – but in other countries too, a shift in grass-roots opinion suggests the developed world’s middle classes are questioning whether free trade is in their best interest.

Yet this kind of rhetoric ignores a fundamental problem, namely the much higher cost of labour in developed markets. If more tariffs were put in place in the US, for example, this would just increase the cost of these goods for US consumers. And even if some manufacturing production were re-shored, this would likely be automated to a very high degree with few additional jobs created. Finally, given the potential for retaliatory measures from other countries, we think any rise in protectionism would be a lose/lose situation, with a very real possibility of higher inflation and lower GDP growth.

Douglas Reed – Newton, a BNY Mellon company

Popularly known as the globalisation elephant thanks to its shape, the chart above describes how, between 1988 and 2008 the real incomes of both the world’s richest and poorest people soared. In contrast, lower earners in developed countries saw their real incomes fall. Since then, the global financial crisis and its aftermath have seen average worker real incomes in much … read more

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