Three reasons to stay invested
It’s not hard to build a compelling bear thesis when considering the trade war, the yield curve inversion, and the increasing risk of global recession. But when we asked James Blair, Head of Fixed Income Asia Pacific, Capital Group for his perspective, he outlined 3 reasons to stay invested.
While recognising the key risks, James also warned against getting out too early, telling us that:
“It's late cycle, not end of cycle, and there are a lot of assets that can still perform quite well in an environment like this”.
In this 3-minute clip from our discussion, he expands on his macro view and explains why he thinks the sun isn’t setting on investors just yet.
Global growth has been on the softer side. That's been supportive of course for bonds generally and in many cases, it's been supportive for emerging market debt as well.
The US economy is one of the stronger of the economies, of course, globally. Japan has been weak for a long time. We don't see a change to that trajectory. Europe, particularly manufacturing in Europe and core Europe, like Germany has been weak and is likely to stay relatively soft, particularly as China is on the softer side.
So, we're not seeing a lot of growth drivers outside of US. The US Consumer remains strong and this is the conundrum of course for the fed. Do you continue to provide monetary policy easing in an environment where the domestic economy is quite reasonable in terms of consumer and unemployment levels at the same time there are other risks?
So, we broadly see it as a slower growth path, not inflationary and that provides potential for monetary policy cuts and for bonds to continue to rally in certain places.
The question that many are asking is given the yield curve in the US, particularly twos and tens, has gone inverse, is that the canary in the coal mine? Are we likely to see the one pocket of growth, the US, a very important pocket at that, face a recession?
Firstly, the yield curve inversion is important, it is worth noting, but you do also need to look at the corroborating economic data, and we don't think there are enough signs of weakness elsewhere or imbalances that would necessarily imminently affect the U.S. economy.
Secondly, when the yield curve is inverse, historically it's been over a year from when it turns negative to when you actually do see that weakness should it come, and there are reasons why that may be a bit of a false dawn.
Finally, the fed does have a lot of ammunition to cut rates still from here.
So, you know for investors, you don't want to necessarily get out too early. It's late cycle, not end of cycle, and there are a lot of assets that can still perform quite well in an environment like this.
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