Why are developed markets so weak?

Mark Burgess, CIO, EMEA at Columbia Threadneedle Investments looks at the recent market weakness and our 2016 growth forecasts, he considers why developed market growth is so weak, despite the numerous monetary stimuli and highlights why active management should outperform in these markets.

To say it has been a difficult quarter for investors would be an understatement, with markets and investor confidence experiencing the most significant weakness for many years.

We have all read and heard about the challenges facing China, and the implications for the global economy, but the issues are broader than just how China and the developed world copes with the former’s inevitable slowdown.

Depending on one’s starting point, we are now some seven or eight years on from the start of the Global Financial Crisis (GFC). For what it’s worth, my reference point is the HSBC profit warning in February 2007 when it cut its profit forecasts.

Even if the crisis didn’t really start with a vengeance until 2008, history would suggest we are closer to the start of the next downturn than we are to the end of the last one. Even with ultra-loose monetary policy developed world economic growth is modest at best. On our forecasts, global growth is going to be only 3.5% in 2016, and will be much weaker than that in much of the developed world.

In the US, the strongest developed market, growth forecasts continue to come under pressure, acting as a restriction on the authorities’ ability to start normalising interest rates. In Europe, growth could pick up but only to 1.5% next year, despite massive monetary stimulus, a much weaker euro, and a big fall in energy prices.

Even in Japan, where QE is now running at over 14% of GDP per annum, growth and inflation are very hard to come by, with growth set to be no better than 1.5% next year.

This is why China matters so much; it has been such a significant driver of marginal growth. With credit-fuelled investment spending inevitably slowing down, or even potentially coming to a halt, the effects this has on the global economy and financial system are significant.

For commodity prices, we have already seen the collapse in the oil price and in industrial metals more broadly as consumption has been curtailed. With new areas of supply for oil, and unwillingness by OPEC to cut production, the oil price has fallen to levels previously difficult to imagine. Although this is effectively a much-needed tax cut for Western consumers, so far they appear to be saving rather than spending their gains.

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