Active Thinking

At GAM Investments’ latest Active Thinking Forum, two of our brightest investment minds discussed the growth outlook for emerging economies and commented on central bank policy in developed markets.

01 November 2021

Michael Biggs – Global Macro & EM Debt

The last couple of months have delivered a series of negative shocks to markets globally and emerging economies in particular. Q3 GDP numbers out of China were particularly weak and consistent with disappointing industrial production growth. Rising Chinese export data was one bright spot, although on closer inspection much of the growth is probably attributable to inflation rather than volumes. Meanwhile supply constraints persist, most notably in the semiconductor market. Elsewhere, US inflation expectations and 5-year Treasury yields have risen, putting pressure on risky assets. On top of this, Covid-19 cases in Europe and the UK are rising again, fuelling fears of a winter wave. Such negative events have held back growth. But it is not all doom and gloom. Despite these headwinds, we remain constructive on emerging markets (EMs). In our view the demand picture is positive and robust, and as supply constraints ease global growth should rebound. Aside from South Asia, EM growth expectations continue to be revised upwards. We are positive on EM FX where balance of payments fundamentals appear most solid and favour currencies which would likely benefit from a global economic rebound.

Rahul Mathur – Global Macro & Currency Fixed Income

In the US, consumer discretionary services data and payroll growth were weak during Q3. This was largely attributable to outbreaks of the Delta variant of Covid-19, although cases across much of the US began to decline in September. We are starting to see tentative signs of recovery – restaurant bookings, airline passenger numbers and hotel occupancy rates are all rising. Looking at the inflation picture, goods prices, including used car prices, have resumed their surge. Rent inflation – which accounts for approximately a fifth of the Personal Consumption Expenditure (PCE) Price Index, or the PCE Deflator, the Federal Reserve’s preferred inflation measure – is growing at the fastest pace in 15 years against a backdrop of soaring home prices and robust demand for accommodation in major cities. Meanwhile, US producer prices are continuing to rise, driven by rising energy costs and depressed labour market participation.

Developed market fixed income remained under pressure during Q3. Looking ahead, we believe that the supports for bond yields continue to subside and that the risks of structurally higher inflation are emerging, driven by pent-up demand, reduced labour supply and a substantial overhang of monetary stimulus. For investors, central bank policy is an area of significant importance at present. Andrew Bailey, the governor of the Bank of England, recently warned that it will have to act to curb elevated medium-term inflation expectations. The Federal Reserve has signalled it is likely to announce start of tapering, although chairman Jerome Powell has been keen to differentiate between the need to taper in the near-term versus rate normalisation. It is worth remembering that since the global financial crisis, markets have consistently overestimated the extent to which central banks would normalise policy. In addition, there remains a strong political will to generate inflation in order to alleviate high debt burdens.