Seven themes shaping financial markets and investments
By Kirsten Hastings, 19 May 16
The long term trend of easily securing healthy returns is coming to an end and investors now face the challenge of how
to generate reliable capital growth and income. Aviva Investors has identified seven drivers of long term investment returns. They can be seen by clicking through the following pages.
With the global economic outlook still relatively fragile, it appears monetary policy around the world will remain extremely loose for a good while yet. Indeed, even in the United States where the labour market has continued to tighten, expectations of stronger inflation remain low.
The Federal Reserve surprised investors when it seemed to express more concern about the external economic environment than the domestic one and began talking about slowing the pace at which monetary policy is likely to be tightened.
As a result, real US monetary policy (allowing for inflation) will effectively remain unchanged this year.
The Fed’s comparatively accommodative stance should relieve some of the pressure on central banks in emerging nations, many of which have had to hike rates to defend their currencies and quell inflation. Meanwhile, Aviva Investors anticipates that the European Central Bank will keep policy accommodative but not loosen it further while the Bank of Japan will continue easing.
All told, Aviva Investors expect monetary policy around the world to be looser than previously envisaged. That should underpin global economic output, at least in the short term. But there are now question marks as to how effective this policy action will be in the long run.
It seems likely there will be a tug of war developing in financial markets, with periods of relative calm when markets have confidence central banks remain in control, interspersed with highly volatile periods when fears that policy is becoming ineffective dominate.
A key risk for markets is stronger-than-expected US inflation. That might put pressure on the Fed and result in markets pricing in a more aggressive path for rate hikes – with significant consequences for the US dollar and all asset classes.
Tags: Aviva | China | Federal Reserve | US
