Repost: Investing for slower growth

Check out the latest investment and financial advice from the Royal Gazette:

 

Tariffs challenge: Christine Lagarde, the IMF managing director, says trade disputes have added to business uncertainty

 

With the US stock market averages hitting new highs, selectivity will likely be the key to successful investing in the months and years ahead. Some trends will persist but others may fade as the extended economic recovery approaches record duration.

 

For one thing, investors should prepare for slower growth going forward. A recent report from the International Monetary Fund forecast world gross domestic product growth will decelerate to 3.5 per cent this year from 3.7 per cent in 2018. Longer term, the rate of forward progress will probably be much lower.

 

Impediments to growth in today’s world are rising protectionism, increasing trade tensions, a decline in business confidence and questions about what the Fed and ECB will do with their stretched balance sheets and the large and growing budget deficits across the developed world.

 

According to another report published by Organisation for Economic Co-operation and Development, US growth is forecast is to decelerate to 2.6 per cent growth in 2019 and 2.2 per cent in 2020, down from the last year’s rate of 2.9 per cent. However, a US recession is not expected.

 

Meanwhile, Europe is struggling with a moribund economy. Italy is in recession and Germany is very close to having one officially. European equity markets have dramatically lagged the US over the past few years and interest rates in the euro currency are still negative for most short duration bonds.

 

The European Parliamentary Research Service recently published a long-ranging report on global output which listed the following megatrends:

 

• A richer and older human race.

• A more vulnerable process of globalisation, with uncertain leadership.

• A transformative industrial and technological revolution.

• A growing nexus of climate change, energy and competition for resources.

• Changing power, interdependence and fragile multilateralism.

 

Economic growth is simply the product of a country’s work force growth and the productivity of those workers. Financial leverage has also played a part in temporarily magnifying corporate profits and GDP in many regions. However, leverage has its limits and usually ends with a need to deleverage.

 

 

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