A bumpy ride ahead
This time, it’s different—a somewhat overused phrase, but also one that’s strangely apt for the current macroeconomic environment: We’re in the midst of a services-led recession; we’re experiencing mild inflation, despite being in the throes of a sharp economic contraction; and global government debts are rising at a pace that would be considered untenable just a year ago.
Periods such as this can render many so-called tried-and-tested economic theories and investment models less useful, as they’re based on assumptions that bear little resemblance to the current environment. This is particularly important in the coming two to three months as we enter the second phase of our three-phase recovery framework: the stall out.
During this period, we expect the momentum behind the global recovery to slow substantially, creating a more problematic environment for risk assets as a new suite of challenges emerges. While the coming months aren’t likely to be devoid of tailwinds, we believe they’ll be largely defined by headwinds and obstacles: The continued need for social distancing measures will keep a lid on business operating capacity, which will likely translate into further job losses and hurt aggregate demand. Meanwhile, geopolitical tensions continue to escalate globally, and there’s a chance that they haven’t been fully priced into the markets.
Key macro themes likely to shape the coming months
In this edition of Global Macro Outlook, we outline the key macroeconomic themes that are likely to shape the financial markets during the stall-out phase of the recovery and highlight how it’s playing out in major economies around the world.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social, and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.
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