City Financial's Harris: Is this a mid-cycle slump or the start of something more serious?

clock • 2 min read

Mark Harris, head of multi-asset at City Financial, warns the risks of policy error are high if the global situation worsens.

A confluence of unexpected events have impacted global economic growth and inflation expectations. The result has been painful for many multi-asset portfolios as consensus expectations for a strong rebound in US economic growth have proven misplaced.

Against this backdrop, equities struggled to make significant headway and have corrected sharply amid low August liquidity. Meanwhile, government bonds have rallied as sentiment weakens. They had become an increasingly popular underweight as a US interest rate rise appeared imminent.

Events in China have had a significant impact on asset pricing.  

A renewed plunge in the oil price has also reduced inflation expectations. Consistently strong supply has pushed the price of WTI crude oil below $40, a drop of over 37% between June and August.  This further global deflationary impulse has provided important support for government bonds over the period.

Goldmans: Oil price could plummet to $20 per barrel

In contrast, the long-awaited growth fillip from lower oil prices has failed to materialise. In past cycles, consumer spending has responded strongly to less expensive oil, but the impact has been extremely muted in 2015. This highlights the confounding nature of the current economic cycle, in which high debt levels cause unpredictable and unusual relationships between macroeconomic variables.

In the absence of a consumer boom, economic growth has been anaemic and, according to recent data points, may be stalling in the US. Both wage inflation and manufacturing data in August have been exceptionally weak, increasing the risk that the country is entering recessionary conditions. 

The key question is whether this proves to be a mid-cycle slump or the start of a more serious episode.

Central banks have limited room for manoeuvre, with near zero interest rates, and have been very poor at understanding the current, post-crisis economic cycle. The risks of policy error are high and further weakness may materialise before a credible short-term policy response is forthcoming.

Bull Points

  • Mid-cycle corrections are not uncommon and central banks are likely to act to support economic growth
  • Equity valuations are more attractive in many regions (outside the US) following the sell-off

Bear Points

  • Global debt levels remain high - the world is not well equipped to navigate a significant economic downturn
  • US economic data is weakening at a time when equity valuations are demanding

Mark Harris is head of multi-asset at City Financial

p32-sp-global-1200-sector-returns-140915

More on Multi-asset

AJ Bell cuts fees across multi-asset income range

AJ Bell cuts fees across multi-asset income range

£1.5bn of inflows this year

Beth Brearley
clock 14 November 2024 • 1 min read
Scopic Multi-Asset Performance Review: Hawksmoor Vanbrugh fund

Scopic Multi-Asset Performance Review: Hawksmoor Vanbrugh fund

Performance review of multi-asset funds

Paul Ilott, Scopic Research
clock 18 October 2024 • 4 min read
Robeco bolsters multi-asset offering with launch of Flexible Allocation strategy

Robeco bolsters multi-asset offering with launch of Flexible Allocation strategy

Fourth multi-asset strategy

Linus Uhlig
clock 25 September 2024 • 1 min read
Trustpilot