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World growth for 2016 is expected to be the slowest in the last 25 years

Global growth, currently estimated at 3.1% in 2015, is projected at 3.4% in 2016 and 3.6% in 2017. However, due to the worst January start since the Great Depression in 1930, market analysts (IMF, World Bank, S&P, Moodys, to name but a few) are reassessing the accuracy of their financial forecasting models.

These deem world economic outlook hinges, in the main, on the poor macroeconomic indicators emanating from the emerging markets and developing economies. To add salt to the injury, even the advanced economies are also expecting a more modest and uneven recovery in 2016.

Notwithstanding the above, the slowdown and rebalancing of the Chinese economy (second biggest economy, in GDP terms), coupled with crucially low commodity prices, have had a compounded negative effort on central banks (notably the European Central Bank and Bank of Japan) spigots in their quest to pump more liquidity into their economies.

Lack of harmony in central banks
A symphony orchestra conductor is needed for central banks to harmonise economic cycles, as the US gradually tightens their monetary policy in sharp contra flow to other central banks.

The term ‘economic cycles’ describes the course an economy conventionally takes, usually over a seven-10 year period, as economic growth oscillates in a cyclical fashion.

The length of a cycle is measured either between successive economic peaks or between successive economic troughs. Although cycles typically assume a ‘recovery, acceleration, boom, overheating, deceleration and recession’ pattern, in practice it is difficult to identify exactly when one stage ends and another begins and, indeed, to quantify the duration of each stage.

The key issue is monetary policy timing, being in the driving seat and ahead of the curve; get it wrong and the job of correction doubles and the rest is history.

Time is money
During the 2008 financial collapse, the US showed no sign of abating true capitalism, taking the bull by the horns and broached the challenge by throwing the entire financial weaponry arsenal available at the problem. Has it worked? God yes. The proof of the pudding is in the eating and the US is enjoying the lowest level of unemployment since the 1980s and growth may push above the magical 3% in 2016. This demonstrates the resilience in the US recovery amplifying the benefits in being ahead of the curve as opposed to being behind the curve.

In Socialist Europe, we had a restrained measured approach and implemented a series of austerity programmes, and only time will tell which medicine, in the long term, worked.

In the short term, the inertia at the ECB clearly illustrates the efforts of being behind the curve and hence the disparity in the two biggest trading blocks, US and EU.

Will history repeat itself?
The financial landscape today bears no resemblance to that of the past. Since Lehman Brothers and Madoff in the US and Royal Bank of Scotland and Lloyds Bank in the UK, to name but a few, a plethora of changes were instigated to remedy the shortfalls in the financial markets.

I don’t have column space to note all the changes, other than to say, if the measures so violently ushered in do not have the desired effect, then we might as well close up shop and go on holiday.

What about tomorrow?
David Miller at Quilter Cheviot, an asset management company in the UK, whom I am sure has seen all this before over the centuries (heritage dates back to 1771), made the following observations: “Over the last couple of years it has paid to be prudent about one’s optimism. Funded by Quantitative Easing, economic growth was expected to top 3% per annum by a comfortable margin. That always seemed too ambitious to me, but a 2% world with low inflation was still a good place for investors.”

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Sound advice I think, so dependent on one’s objectives, I believe the way forward is to look for investments that are globally diversified and multi-asset based. If you are considering mutual funds, make sure they are daily traded and actively managed. Equally important, in the short to medium term, make sure the fund’s main criteria are to preserve wealth!

By António Rosa
António Rosa is Regional Manager in Lisbon at Blacktower Financial Management (International) Limited
Quinta do Lago: 289 355 685 | Cascais: 214 648 220 | [email protected]
Blacktower Financial Management (International) Limited is licensed by the Gibraltar Financial Services Commission Licence 00805B.