For a few months in late 2017 and at the start of this year, the phrase was unavoidable: synchronized global growth. All of the world’s major economies were growing simultaneously after years of uneven performance following the Great Recession.
The belief was that accommodative monetary policy had allowed growth to occur “across the board,” said Peter Hardy, vice-president and client portfolio manager at American Century Investments, during a late-August interview.
Some “stresses” in that synchronized growth trend have appeared, however, as some central banks are raising rates and tightening policy, including the U.S. Federal Reserve and Bank of Canada. As a result, “You’re starting to see certain areas of the world grow better than others,” said Hardy, whose firm manages the Renaissance U.S. Equity Income Fund.
Growth remains strong in the U.S., with the strength of the greenback putting pressure on other areas, he pointed out. Turkey and Argentina, for example, have seen their currencies devalued and inflation soar in recent months—Argentina accepted a $50-billion bailout from the International Monetary Fund in June.
China’s currency has also suffered, Hardy said, and its stock market has dropped more than 20% since the highs at the start of the year. Some of the broad emerging market indexes have sold off more than 10%, he added.
Global trade tensions have played a role, with tariffs—both threatened and imposed—“creating another volatility-inducing headline,” Hardy said. But, for the most part, markets have reacted and then pushed that concern aside, he added.
“While some of the concerns about tariffs are significant, the longer-term impacts tend to be muted,” he said. “When we go company by company, the impacts are far less severe than the stock price reactions have been. Some companies even benefit from tariffs due to their geographic location.”
Companies can also pass on cost increases over the long term, or they can relocate their manufacturing facilities to remove some of the long-term impacts from tariffs, Hardy said.
Inflationary pressures will be on the radar of markets and investors in the short term, Hardy said. And those pressures could “exacerbate a situation for financial assets that could already be difficult due to the Fed raising interest rates.”
He adds: “If you see higher inflationary pressures, that further increases the likelihood of […] more interest rate increases, which puts pressure on asset prices.”
Investors can manage some of the risks in the current environment through portfolio diversification, he said. “Having exposure to emerging markets is beneficial,” he added, and it’s useful to offset “that exposure by having some low-risk equity investments or some fixed income.”
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