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Many risk-aware strategies have delivered acceptable returns in recent years, but their drawdown protection hasn’t been fully tested in the long post-2008 equity rally.
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Despite the modest second quarter rebound, the economy’s growth rate has been generally sluggish over the past five years. This may suggest lower potential growth going forward—and less resource slack for the economy to grow without triggering a rebound in inflation. Third-quarter reports on jobs and wage growth will be critical for the Fed in determining when to start raising rates.
Indonesia’s decision to scrap domestic fuel subsidies and use the savings for needy infrastructure projects marks a big step forward for the country’s fiscal health. It not only lessens the burden of doling out subsidies, but represents a better allocation of resources, which should help to strengthen the economy.
The Bank of Japan’s (BOJ’s) new core inflation measure has generated some cynicism in the market, as it indicates that inflation may be closer to the BOJ’s target than other measures suggest. We think this distrust is misplaced. To us, the new measure emphasizes the BOJ’s eclectic approach to judging the inflation pulse, indicating that a tapering, not a further easing, will be the BOJ’s next move.
The Brazilian government has announced a deeper-than-expected cut to its primary fiscal surplus target for this year and next. This reduction has economic and political implications, and could result in sovereign-credit-rating downgrades even sooner than we initially expected.
Consumer spending in the euro area is now growing at its fastest since 2007. Lower oil prices have helped but are only part of the story, in our view. There’s also been a steady improvement in labor-income growth and consumers are finally willing to borrow again. Both factors should underpin consumption, and the recovery more generally, when the boost from lower oil prices starts to fade.
The global economy continues to expand at a moderate pace and our growth forecast of 2.7% for 2015 is unchanged from last month. A modest acceleration to 3.2% is expected for 2016.
Since the last bout of volatility in mid-2012, global equity markets have been relatively calm, rising by more than 50%. There have been few signs of rising inflationary pressures, and corporations continued to deliver strong earnings growth. But a recent acceleration in wage growth and an uptick in bond volatility may increase uncertainty and test the effectiveness of risk-management approaches.