印刷する
Share

Economics

Panic over, but what's next for markets?

Having recovered their composure after a tumultuous start to 2016, investors are now looking for a new catalyst, but what will it be and where next for markets?

06/04/2016

Keith Wade

Keith Wade

Chief Economist & Strategist

Markets have regained their risk appetite following action by central banks, a firming in commodity prices and evidence that the tail risks of a US recession or a China hard landing are not materialising.

Going forward we will need to see greater evidence of stronger activity for the rally to continue; however, this is also likely to bring the Federal Reserve (Fed) back into play, posing a challenge for investors.

Why have markets rebounded?

After hitting the panic button in January, investors have regained some composure: shares and corporate bonds have rallied whilst the risk appetite index has moved out of panic mode.

Arguably, the market simply became oversold and was due a bounce, but the key macro factors underlying this were the actions of central banks and firmer economic data, which have reduced the tail risks facing the world economy.

This may carry assets higher from here, but for a sustained improvement we need to see better growth in real GDP and corporate earnings.

The tail risks have eased, but has the outlook brightened?

At this stage, it is difficult to make the case for an acceleration in real GDP growth.

Our indicators point to steady but not spectacular growth, a continuation of the pattern of recent years where the world economy struggles to get growth much above 2.5%.

However, the Fed is still expected to lift rates - twice this year in our view - raising the prospect of further dollar strength and renewed market volatility.

It is possible that, as we have just seen, the selloff in markets then drives the Fed back and it stays on hold. Markets could then rally again.

However, this is not sustainable given the very low level of US interest rates and the late stage of the economic cycle.

Could we be surprised on the upside?

There are scenarios where growth is stronger than expected. One would be where the lags from the fall in oil prices continue to feed through and support consumer spending.

It should not be forgotten that the lags are long and consumers take time to recognise when a change is permanent rather than temporary.

We have also noted that the savings rate in the US remains high and whilst this might be a permanent feature of the post-crisis world, the improvement in wealth suggests that consumption could get a boost from lower savings in 2016.

Another scenario would be an improvement in productivity. At this stage this looks unlikely, given the weakness of capital investment spending, and so, as we have argued before, we may have to wait until governments recognise that monetary policy has run its course and other means of stimulus need to be deployed.

Important information: The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall. Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.