Although forecast to grow by 6.4 per cent in 2016, there are fears over the health of China's economy and the impact this could have on the global economy. Coupled with the lack of real growth that developed market economies are experiencing, the threat of slipping back into a global recession is growing. This is despite central bank intervention, with its commitment to low interest rates, which has pumped money into the banking system and created a five-year bull market in equities yet at the same time has failed to generate meaningful inflation.
"I think the actions of central banks over the last eight years have a great deal to do with investment outcomes in pretty much every asset class," said Ewen Cameron Watt, Chief Investment Strategist, BlackRock. "Most central banks are either on the edge or have already set themselves up to abandon their medium term inflation targets. It is essential for them to do that if they move to a negative interest rate policy; it will create a whole different set of incentives including redrawing debt contracts."
Asked to vote on whether the world was heading for a material downturn, which would have (further) grave consequences for risky assets, 64.5 per cent agreed.
Cameron Watt's panel, moderated by Han de Jong, Chief Economist, ABN AMRO Bank, and which also included Jenny Rodgers, Portfolio Manager, M&G and Blu Putnam, Chief Economist and Managing Director, CME Group, did not necessarily agree with the audience.
"We are in a low commodity price era, and in the long run that will support global growth," said Putnam. "This is not a huge deleveraging exercise like in '08, so I'm not really worried about `grave' consequences. The outlook three or four years down the road I think will be good. 2016 will be a slow growth year."
Cameron Watt said that the lack of nominal growth and the increase in the real cost of debt (and subsequent monetary response), would be a "critical narrative".
"I disagree that the consequences are going to be grave but I do think we are in a constrained nominal growth environment which increases the real cost of debt and the response to that will set the outcomes for asset markets."
Rodgers said that rather than worry about central banks, the oil price etc, it was important to step back and look at the economic data, which would suggest that certain parts of the economy are slowing down (i.e. industrial production) but other parts are improving and that overall there was not a major economic problem.
"The short-term impact on risky assets is being driven by human emotion, rather than fundamental economics. That is what is creating excess volatility in the markets as opposed to the underlying fundamentals. That creates opportunities for investors," said Rodgers.
The audience was then asked whether central banks had little or no ammo left and had lost credibility. Two thirds (67 per cent) of the audience were in agreement, suggesting there is little sympathy in the market for the way that central banks are handling the situation.
Putnam argued that central banks do have more ammunition left, they just aren't willing to use it. His point here was that it matters as to what assets central banks are choosing to buy.
"The highest quality asset purchases such as US Treasuries are not going to increase credit growth or impact the real economy other than lower bond yields. I think the only ammo that would work now is to buy government debt associated with government spending; a fiscal policy basically. Though this is very unlikely," suggested Putnam.
Rodgers said that the likelihood of a further rate hike by the US Federal Reserve would very much be "data dependent", with Cameron Watt adding that investors should wait to hear what central banks say with respect to their medium-term inflation rate targets. "That will inform you how far down the negative nominal rates cycle they want to go. I think the US Federal Reserve is likely to have one more rise but it likely won't happen before June," said Cameron Watt.
Perhaps one of the most significant tail risk events over the last 18 months has been the extent to which the crude oil price has fallen. As Michael Coleman, Managing Director, RCMA Asset Management explained in his keynote address ("Commodities – How low for how long?"), the current price of oil has yet to find a bottom as it continues to grapple with a fundamental oversupply issue.
The world is literally flooded with oil meaning that even at low prices the demand response is not coming through. And it won't happen until global GDP growth picks up. What was interesting was that when asked, "Where do you think average global GDP growth will be in the next few years?" 60 per cent of the audience voted that it would be below 3 per cent, with 34 per cent voting between 3-4 per cent. At the same time, when asked, "Where do you think the price of nearby Brent will be in three years?" some 61 per cent of the audience voted for between USD30-50.
Problem is, said Coleman, "to get meaningful recovery we need to see global GDP growth of 4 per cent or more".
He showed that natural gas and bulk freight prices were seven years in to a price correction, yet crude oil was only two years in "and there is no sign that demand correction has worked". With the Saudis and Iranians at an impasse, with the latter wishing to increase supply, the likelihood is that oil prices could remain suppressed for longer than expected.
"It is hard to know how much further oil prices could fall. It is trying to find a bottom but it's not there yet; we simply haven't seen a supply response. The last thing producers want to do is cut production. It means they can't service their debt. Producers have to be ground through the mill to pull back on production supply," said Coleman.
With the potential for a continued period of low oil prices, and central banks adopting negative interest rate policies, the macro headwinds are likely to remain for some time to come
