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Global economy slowing but central banks ride to the rescue


Latest purchasing manager surveys show persistently week industrial activity across the globe: the Markit manufacturing PMI for the euro zone, China and emerging markets scored 47.6, 49.4 and 49.9, respectively. In the US, industry held up somewhat better with a manufacturing ISM of 51.7, but the trend is nonetheless downhill over recent months. In contrast, services are showing some resilience. The Markit non-manufacturing PMI came in at 53.4 for the euro zone, 52.7 for China and 51.7 for emerging markets. Weakening global trade amid faltering US/China trade talks is weighing on industrial exports and tarnishing the outlook for global growth, which should nonetheless remain above 3% in 2019 and 2020.

In the end it was again the US economy that held up best. Household confidence is running at a high and consumer spending is growing 4.2% year on year. This should help ease the problems of global industry which continues to churn out poor figures, particularly in Asia: Korean exports were down 13.5% on the year in June and Markit's manufacturing PMI dipped below 50 in June for Japan, Australia, Malaysia, South Korea and Taiwan.

Concerns also include the lack of any clear bounceback in Chinese growth despite the stimulus measures that have been running for several months now. No doubt it is a question of time, as the sharp rise in lending must eventually feed through to better figures for investment and consumption. We remain confident that the authorities will be able to give the economy its second wind.

Tensions between the US and Iran are also worth watching. A rapid rise in the oil price could weaken importer countries, most prominent among them the EU and the People's Republic. That said, Russia and the US now play a central role in the world's oil production and supply is currently outstripping demand. Hence, any disruption to traffic in the Strait of Hormuz should not drive the oil price up to heights that would harm global activity.

Against this gloomy backdrop, markets nonetheless seem calm. US equity indices keep marking highs. Underlying this is the promise of strong liquidity. Fed and ECB alike are heralding interest rate cuts and even a return to monetary policy easing in the ECB's case. Christine Lagarde’s appointment to head the old continent's monetary authority endorses this scenario as the current IMF president has frequently endorsed the policies of Mario Draghi over recent years. These joint steps by central banks either side of the Atlantic represent massive support for equity and credit markets whose yields remain attractive in a world where a growing portion of sovereign debt is paying negative rates. The impact of the global growth slowdown for share prices should be more than offset by the orchestrated rate cut by central bankers.

In these circumstances, we are maintaining our exposure to risky assets with a preference for European and Japanese equities, whose prices lag the US market suggesting some catch-up to come. Emerging market debt in local currency is another of our key convictions. The risk is well rewarded and the Fed's accommodative stance should favour the asset class. Investment grade credits, particularly the BBB tranche in USD and sterling, still have some upside. Finally, in sovereign debt, Italian govies remain an opportunity.

Article by Florent Delorme, macro analyst at M&G Investments. Source data: Bloomberg

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