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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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Many Asian economies have seen their growth rates slow toward, or below, their potential growth rates in recent years. Moreover, the potential growth rates themselves have also slowed owing to changes in demographics, investment trends and productivity growth. As a result, investors should be braced for surprises, for instance, in monetary policy or the relative value of currencies in the region.
The sharp and sudden sell-off in equity markets worldwide raises growth fears once again. But the economic foundation in the US today is much stronger and broader than it was during prior equity sell-offs. This leads us to conclude that the recovery is on a sustainable path—and could even tolerate the normalization of official interest rates.
Although the global backdrop has darkened, we expect the euro-area recovery to remain on track, helped by low oil prices and supportive monetary conditions. The ECB is unlikely to provide fresh stimulus at this stage. But persistent downward pressure on inflation should keep the central bank in dovish mode and could make additional asset purchases after September 2016 a real possibility.
Falling commodity prices, subdued economic growth and the prospect of higher US interest rates have pressured currencies throughout emerging markets. Persistent currency weakness is bound to feed through to domestic prices eventually. That will push central banks toward tighter monetary policy.
Global growth remains modest as crosscurrents from weaker commodity prices and the changing pattern of global trade continue to hurt some countries, while benefiting others. We expect 2015 global growth of 2.6%, more or less in line with the forecasts of the past several months. In 2016, we expect it to quicken to 3.2%, with acceleration seen among emerging and developed economies.
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.
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.