The implications of financial stress

08 October 2015

The quarterly Global Outlook from Standard Life Investments considers how investors’ portfolios should be positioned for the next phase of the cycle, after a prolonged period of financial stress.

The world economy faces an important juncture, with tensions growing in different areas:

  • Healthy consumption and services vs weak manufacturing and exports.
  • Resilient developed economies vs stressed emerging markets.
  • US monetary policy settings diverging from those in China, Japan and Europe.

Against this backdrop it is no surprise that the prices on many financial assets are fluctuating widely. So what is the longer term picture?

Jeremy Lawson

Jeremy Lawson, Chief Economist, Standard Life Investments said:

"We continue to see a moderate global expansion into 2016, supporting modest corporate earnings growth outside the energy and materials sectors. Our view remains that a widespread or systemic emerging market financial crisis is unlikely, but the pressure on a number of large developing economies will not disappear quickly. Global GDP growth is expected to improve marginally but remain below trend. "

“The implications for investors are considerable, as they need to consider throughout their strategic asset allocation process what the repercussions are of low returns on bond, cash and equity prices over the remaining part of this business cycle. Listed equities in particular are sensitive to developments in global activity as they tend to have larger external exposures than do economies as a whole. Moving up the capital structure towards selected credit may have advantages in this environment. "

“At the epicentre of the crisis, in China, a hard landing is not our central scenario as we expect extra fiscal stimulus, but the transition to a new growth model will remain bumpy and unfriendly for commodity producers. More deceleration in growth could lie ahead and the Chinese currency is likely to weaken moderately against the dollar. "

“Our forecast assumes no further falls in commodity prices and stabilisation in the recent levels of financial stress. If stress builds further then there is a large risk that growth will not rebound, through its effect on consumer and business sentiment, when monetary policy easing in the developed economies will quickly come back on to the agenda.”