Our outlook of the week: The summer was quiet

Market analysis - 8/25/2016

Actions by the central banks have resulted in a favourable environment for financial assets.

During the summer of 2016, volatility remained low, unlike last summer, which was unsettled by the yuan’s surprise depreciation and by questions surrounding the Greek bailout. This summer’s calm can be attributed largely to the lower probability of a global recession thanks to the major central banks' proactive monetary policies, especially since the Brexit vote. Emerging markets fared best in this environment. Benefiting from a comparatively lower valuation and getting a boost from the rebound by commodities, they outperformed developed stock markets over the summer (+9.7% vs. +5.1% since the start of July). These developments are in line with our growth forecast and our interest-rate scenario. And with the next rise in US interest rates unlikely before December, emergingmarket central banks can focus on supporting domestic economic activity through possible rate cuts.

The diverging trajectories between emerging and developed stock markets correspond to our growth projections, which call for accelerating global growth in the second half thanks to expansionary
monetary policies and the rebound by commodities. Economic activity in developed countries continues to expand, while emerging economies appear to have reached a low point in their economic cycle and should now experience a pick-up in growth.


Chinese economic activity, which is a key variable in the performance of the entire emerging-market sector, has stabilised, and this is a positive development. Still, structural imbalances in that country remain as challenging as ever, and these include high levels of debt and a declining marginal return on investment. The scope of the government’s stimulus measures will continue to be scaled back in the second half of the year. New lending and a rise in investment, retail sales and industrial production should follow the same easing trend. None of this should prevent the government from achieving its +6.5% GDP growth target for 2016, however.

Chinese trade-related figures for July are also in line with broader trends. Chinese exports, although low (-4.4%), are levelling off as global economic activity picks up. And imports, mainly of commodities, are weak (-12.5%), in a sign of slowing aggregate demand in the country.

The stabilisation of growth in China and the guarantee of a high level of liquidity worldwide are the result of policies outside of the business world, as they were put in place by governments or central banks. While this environment is beneficial for financial assets at this point, keep in mind that this modus operandi is likely to lead to a disconnect between asset prices and fundamental reality. In the long term, this sort of situation normally generates volatility.

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