Economic and asset allocation views covering Q3 2016. This includes a global trade research note, global strategy update on Brexit implications and a mid-year performance review.
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The second quarter saw a powerful rally in sovereign bond markets which took yields to new lows in many major markets. The bond market rally gained added impetus from the UK vote to leave the European Union on 23 June.
The economic impact of Brexit will be felt most keenly by the UK and will also dampen eurozone growth. However, the global impact is negligible as the UK only represents about 4% of world GDP and contagion effects through financial markets have been contained by the central banks.
We would see the main impact from Brexit as being a warning that populist politicians should not be underestimated in the current environment where a large proportion of the population are dissatisfied with the establishment.
If there is a silver lining from the fall out from Brexit it may well be found in the emerging markets. Medium-term prospects remain difficult but the prospect of an easier Federal Reserve rate policy has allowed investors to refocus on fundamentals.
We have yet to see the macroeconomic recovery that would accelerate emerging market growth but as inflation eases and currencies stabilise we have become more constructive on the region.
From feast to famine
Global trade growth has been subdued by historical standards since 2012, and weakened further in 2015. The key question is whether this is a cyclical or structural phenomenon.
We find there is undeniably a structural element, so this weaker trade growth is set to last.This has implications for asset class performance and economic growth, particularly in small, open economies, and so consequently also for policymakers.
Structurally lower interest rates and a global tendency towards currency wars seem a likely outcome.