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Market View

Does a Goldilocks economy mean
looking out for bears?

Economic outlook

The global economy started this year as it ended the last – neither hot enough to force interest rates higher, nor cold enough to adversely affect companies looking to grow their bottom line. With many arguing that conditions are “just right”, the fall in the US stock market over the past few days – and it’s impact on other global markets – demonstrates that we’re still a long way from a Goldilocks economy.

The fall in the US stock market and subsequent 3% dip in the FTSE reflects a more uncertain global economic picture than many commentators had expected. While asset prices continue to be supported by strong global growth and positive forward-looking sentiment – all under-pinned by low interest rates – market jitters have arisen on the prospect of higher US inflation, brought about by a strong labour market and higher oil prices.

But none of this alters the fundamentals: the US and Europe continue to gather economic momentum, and the outlook for emerging markets and China is good. Even the UK is reaping some of the rewards of a buoyant global economy, despite its own domestic issues. All in all, the immediate outlook continues to be encouraging, and we expect the impact of stock market falls to be short lived, allowing positive tailwinds to continue for some months to come.

If we look beyond the near-term – possibly as much as 18 months from now – there are signs of a changing dynamic. As central banks bought bonds (through their quantitative easing programmes), they artificially suppressed volatility and yields while driving up asset prices. Over the course of the past few months, this process has slowly begun to reverse, and as this gains momentum the opposite could be true – higher volatility and lower asset prices. The real puzzle for the market to solve is: at what point will higher interest rates affect equity prices? We think that there is a strong argument for higher interest rates, but even a after a moderate rise they would still be considered low by historical standards - supporting the economy and risky investments. So the question is one of timing and Goldilocks would be wise not to sleep too soundly.

“Markets got off to a flying start in 2018, but the recent falls show that the real story is going to be how they react to the changing activity of central banks as the year continues. We still see opportunities in emerging markets, where valuations are more reasonable and company earnings growth has strong momentum, but we’re more cautious elsewhere, despite generally positive market sentiment.” - Philip Smeaton, Chief Investment Officer

Investment view: Piecing together the bond puzzle

For the first time since the financial crisis, we expect to see a net supply of government bonds to the private sector. This contrasts with the recent trend, where central banks bought enough bonds through their quantitative easing programmes to create a shortage, which forced yields lower. To put this into context, central banks were buying $3 billion of bonds per day last year, but over the course of the next 12 months, we expect this to swing to a net supply of $2 billion per day.

The question is – who is going to buy these bonds, and what will it mean for bond yields? There are off-setting factors (such as ageing demographics) which will absorb some of this supply, but we are already seeing pressure on government bond yields and they still appear to be some way off levels that are attractive enough levels to entice investors to step up to the plate. A robust economy, higher oil prices, tightening labour markets, a weaker dollar and higher raw material prices are exacerbating this pressure on yields, which has caused the recent fall in the US stock market – as higher yields made investors question equity valuations.

Equity markets have only priced in a small increase to bond yields, possibly because they have a long way to go before they’re considered anything other than low. But there will come a point when rising yields starts to impact the relative attractiveness of riskier assets, hence our cautious stance on government bonds and equities alike. We don’t think we are there yet but there are clear signs that this is going to be the most important theme for markets going forward.

Reversing Quantitative Easing

  • The US Federal Reserve is reducing its holdings in bonds to the tune of $20 billion per month this quarter, with a target of $50 billion per month by the end of the year.
  • The US government deficit is already at 3.5% of GDP ($666bn), and with new tax cuts now approved, this is set to increase even further. This deficit must be funded by issuing treasuries.
  • Last quarter, the European Central Bank was buying €60 billion of bonds per month. This has now halved to €30 billion and will remain so until September. Given Europe’s strong economic performance, we don’t expect to see this quantitative easing extended beyond September. Instead, we think that gradual policy normalisation is more likely.

​News from Sanlam

We’re delighted to announce that Sanlam’s Bespoke and Managed Portfolio Services, as well as our OneSIPP, have been awarded a five-star rating by Defaqto. Defaqto independently rates products and propositions across the whole of the market. The award is based on the quality and comprehensiveness of the features and benefits it offers, so we’re delighted to have received the top accolade.


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This article is for information purposes and should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by Sanlam Private Wealth. Any expressions of opinion are subject to change without notice. Reproduction of this commentary is not allowed in whole or in part without prior written agreement from ‘Sanlam Private Wealth. Past performance is not a reliable indicator of future results. Investing involves risk. The value of investments, and the income from them, may fall as well as rise.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.