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Standard Chartered Online Trading

H2 Global Market Outlook: Titling Towards Reflations?


Accelerating growth and modestly higher inflation are likely, according to Standard Chartered Wealth Management team

Thanks to strong earnings growth, reduced political risks in Europe, a weaker US dollar and lower US Treasury yields, financial markets have delivered a remarkably strong 2017 first half. Global equities, led by emerging markets, have returned more than 12 per cent while global bonds have delivered more than 6 per cent.

How will the second half (H2) of the year fare? Mr Steve Brice, chief investment strategist of Standard Chartered Bank, shares four key insights from the Wealth Management team’s outlook for the H2 global market.

1. Pivoting towards reflation
A continued move towards reflation, with accelerating growth and modestly higher inflation, remains a possible economic scenario.

In the second half of the year, inflationary pressures are expected to rise modestly, but this would likely require commodity prices to bottom out again and/or wage pressures to accelerate. This trend would likely be reinforced if there is a pivot towards greater fiscal stimulus in developed markets.

Equities are likely to do well in this scenario, given strong corporate earnings and upward revisions to future expectations, especially in the Euro area and Asia ex-Japan. Strategies with an allocation to growth assets should outperform in the event of a renewed tilt towards reflation.

2. Political and geopolitical concerns remain
There are significant risks in the coming years. In the United States, the political environment remains fluid, with President Donald Trump struggling to develop a constructive working relationship with Congress.

In Asia, it is still uncertain how competing territorial claims and North Korea’s increasing belligerence will be resolved amicably.

In the Middle East, the recent sanctions against Qatar point to a more confrontational geo-political landscape.

In addition, Italian polls, slated for the second quarter of 2018, present a sizeable risk to European unity.

3. A recession is less likely in the next 12 months
The US and the global economy are likely to continue to grow at a reasonable pace in the next 12 to 18 months.

In theory, at any point in time, there is a 20 per cent chance of a recession in the next 12 months. Considering the length of the recovery and the tightness in the US labour market, the probability is currently slightly higher.
There are usually three causes of a recession: An external shock, significant credit excesses or rising inflationary pressures.

The first is difficult to forecast, but the possibility that an external shock could trigger a recession is slightly higher than usual given the unstable political/geopolitical landscape.

As for the second cause, while financial asset valuations have climbed broadly and significantly over the past few years, there are hardly any excesses that are likely to induce a recession in the next 12 months.

On the risk of a sharp rise in inflation, inflation expectations have fallen in recent months as oil prices have dropped and US wage pressures have failed to increase. This means that the risk of the economy getting too hot has declined.

4. Oil prices are expected to rebound
The excess oil supply situation is getting eroded and this will ultimately push oil prices up. US shale production has recovered faster than anticipated and breakeven costs appear to have dived.

However, oil demand continues to be robust, and OPEC (Organization of the Petroleum Exporting Countries) is proving effective at restricting supply and inventories are falling.

Assuming this continues, oil prices are likely to rebound, at least modestly. There is a 75-per-cent probability that oil prices will close the year higher than US$45 per barrel.

For more on Standard Chartered Wealth Management’s H2 Global Outlook, visit sc.com/sg/retail/mce.

The information provided in this piece is not to be taken as investment advice.