Global cooling: Step forward the central banks
As central banks prepare for slower global economic growth, we look at what it means for investors.
3 min read
27 Sep 2021Markets traded around three themes in August: inflation, timing of central bank stimulus reduction and more moderate growth3 min
21 Sep 20213 min
Signs of slowing growth are leading central banks to more supportive policies. The manufacturing sector is growing less quickly across developed economies, and is even shrinking in Europe and the UK, according to business sentiment surveys. Leading indicators – which combine several measures to provide a guide to the future direction of the economy – are also falling.
And growing uncertainty is making central bankers cautious. “Persistently low inflation and uncertainty about the direction of global trade as the US/China trade dispute rolls on are taking their toll,” says Monique. “And of course in the UK the rising chance of a no-deal Brexit is a further area of immediate focus for the BoE.”
Consolidating gains and hedging our bets
In recognition of the riskier environment, Coutts has been reducing risks and consolidating gains. Monique explains, “We’ve reduced our overall equity weighting and have been reducing exposure to riskier areas, like emerging markets, to focus on more reliable developed markets. We’ve taken profits in positions that have done well for us – our technology and health care themes in particular – to lock in the gains.”
It’s worth remembering that growth, while slowing, is still positive, and the global economy – and the US in particular – is still in good shape. Monique says, “We don’t see the signs of an imminent US recession, and despite the rising risks we still prefer equities over fixed income. By taking action early, central banks are hoping to limit the downside of the economic cycle, which could help to support asset prices.”
While we don’t expect an imminent recession stateside, we are keeping an eye on the possibility. With this in mind we have put in place a ‘yield curve steepener’, a strategy that profits if short-dated US government bond yields fall more than long-dated US government bond yields.
Monique says, “Should a recession occur and the Fed cut rates sharply, then this strategy should do well and help to mitigate the effect of any falls in other markets hit by recession.”
Economic troubles are always difficult for investors, but it’s important to prepare for them. Having a professional investment manager looking after your money will help your chances of preserving its value as markets readjust. And when good times do return, it pays to be invested to make sure you benefit from any market recovery.
Central banks in developed markets have been moving towards looser, more supportive economic policies. This is a sign that they are preparing for slower economic growth and a generally less positive economic outlook.
The ebb and flow of global economies is something investors should expect and be prepared for. At Coutts, we have been reducing risk in our portfolios for the last few months in anticipation of a global economic slowdown. We’ve also put investments in place to provide some diversification in case of an economic recession.