united kingdomen
China and the Fed are partners for now

China and the Fed are partners for now

30-04-2019 | Insight
The data will remain bumpy and markets vulnerable. This is likely to be the case until major risks such as a no-deal Brexit and US-China trade deals are resolved, says Fred Belak, head of Robeco’s Global Fixed Income Macro team.

Speed read

  • Financial conditions have eased globally
  • China remains the father of all global growth cycles
  • US productivity growth bottomed out

“With the bears once again growling, it is time to fade them and use the sharp decline in global bond yields as an opportunity to underweight safe haven sovereign bonds whilst moderately overweighting risk for the next 12 months. By using our macro framework that China drives global growth and the US global liquidity, we view the next quarter as the right time to take a contrarian view as the global slowdown reverses course,” says Belak.

“In our previous quarterly, we stated that this was late cycle, but not end cycle because inflation was not yet elevated. The Fed has now also publicly acknowledged its mistakes at the end of 2018 and turned far more dovish.”

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Figure 1 | The Fed quickly responded to the tightening in financial conditions

Source: Robeco. Goldman Sachs, Bloomberg, Robeco

Introducing a public discussion about their desire to allow actual inflation to temporary overshoot 2% at the top of this cycle to keep inflation expectations anchored, signals a large policy reversal that will extend the current cycle and benefit investors now. Eventually, the bears will be given their due once inflation finally forces the Fed to overtighten and bring on a recession, but that is likely to be a story for 2020.

“At our recent quarterly meeting, one of our guests stated cogently that “China has been the father of every cycle since the Great Financial Crisis (GFC)”. Indeed, 70% of global credit growth since the GFC has come from China. The collateral for this credit growth has largely been the Chinese housing market.” As China comes to the end of 30 years of rapid urbanization, driving housing investment, one of the main risks for the global markets remains a housing bust in China.

The other great recurring concern of the markets is that global debt levels are so high and have only grown since the GFC, so that growth is impaired by the need to service debt. We have sympathy for this argument and indeed see this as an important secular risk.

Leave your details to read the full Quarterly Outlook

Disclaimer:

This report is not available for users from countries where the offering of foreign financial services is not permitted, such as US Persons.

Your details are not shared with third parties. This information is exclusively intended for professional investors. All requests are checked.

Subjects related to this article are:

Disclaimer

Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.

The information contained in the Website is NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.

In the UK, Robeco Institutional Asset Management B.V. (“ROBECO”) only markets its funds to institutional clients and professional investors. Private investors seeking information about ROBECO should visit our corporate website www.robeco.com or contact their financial adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing these areas.

In the UK, ROBECO Funds has marketing approval for the funds listed on this website, all of which are UCITS funds. ROBECO is authorized by the AFM and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.

If you are not an institutional client or professional investor you should therefore not proceed. By proceeding please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.

If you do not accept these terms and conditions, as well as the terms of use of the website, please do not continue to use or access any pages on this website.

I Disagree