With GDP growth significantly lower in the United States, slightly better economic figures in Europe, no clear trend in Japan and continuing weakness in emerging markets: as has been the case in recent years, hopes of an upturn in economic growth may well be disappointed again this year. This is the view of Guy Wagner, Chief Investment Officer at Banque de Luxembourg, and his team in their monthly analysis, ‘Highlights’.
Despite In the United States, GDP growth came in significantly below expectations in the first quarter, mainly due to difficult weather conditions during the winter and strikes at the country’s west-coast ports. In Europe, economic statistics improved slightly thanks to the weakness of the euro, despite fewer positive economic surprises since the beginning of April. In Japan, economic activity is still not displaying any clear trend, while in emerging markets it is continuing to slacken. «As has been the case in recent years, hopes of an upturn in economic growth may well be disappointed again this year,» says Guy Wagner, Chief Investment Officer at Banque de Luxembourg and Managing Director of BLI – Banque de Luxembourg Investments.
Stable oil prices have stemmed a further drop in inflation rates
With the stabilisation of oil prices, inflation rates have consolidated at low levels. In the United States, inflation dipped from 0% in February to –0.1% in March, while in the eurozone, the inflation rate rose from –0.1% in March to 0% in April. The Chinese central bank has reduced the commercial banks’ required reserve ratio. The US Federal Reserve has not given any further indications about a timetable for a first interest rate rise. As a result, analysts are not expecting the Federal Reserve’s first rate hike until September at the earliest. In Europe, the ECB is continuing to buy up government bonds at the rate of EUR 60 billion per month. In China, the central bank reduced the commercial banks’ required reserve ratio from 19.5% to 18.5% and is preparing to accept debt issued by regional governments as collateral.
Government bond yields are rising in Europe and the United States
In April, eurozone government bond yields rose. The upturn in yields in Germany, Italy and Spain seems to have been triggered by short positions adopted by hedge funds in view of the paltry level of almost all bond yields in the eurozone. Bond yields also rose in the United States. «Despite the rise, European long rates still lack appeal. US government bonds are the only viable alternative in industrialised countries given that they still have potential to appreciate if economic activity slows further,» asserts the Luxembourg economist.
Equities remain the default investment
US and European stock markets held their high levels in April, while Japanese and Asian stock markets even continued to rise. According to Guy Wagner: «Given the good performance of most shares since the start of the year, a stock market correction at the beginning of the May to October period – a time historically less favourable for stock markets than November to April – would not be particularly surprising.» Unless there is an external shock, equities should maintain their status of investment by default due to the ongoing prospect of a zero interest rate environment for the coming months.