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The economic indicators reassuring Fidelity International right now

03 December 2019

Fidelity International’s lead economic indicators appear to be signalling a positive 2020, especially for emerging markets.

By Eve Maddock-Jones,

Reporter, Trustnet

While market performance has been strong over the course of the year there have been lingering doubts about the overall health of the global economy.

Geopolitical issues such as the US-China trade war and Brexit had continued to cloud the outlook for markets, while weaker economic growth has raised concerns.

However, while the market outlook might appear bleak this winter, Fidelity International said that two of its own indicators are giving it some comfort.

The first of these, the Fidelity Leading Indicator is “keeping the dream of a solid acceleration into 2020 alive”.

Despite edging downwards more recently, the FLI ‘Cycle Tracker’ remains wedged in the ‘growth positive and accelerating’ quadrant.

Fidelity Leading Indicator (FLI)

 

Source: Fidelity International

“This points to global growth picking up pace to solid levels into 2020, and suggests the rise in core government bond yields and the equity market break-out can extend further,” said Fidelity markets analyst Ian Samson.

“Considering key economic drivers, we see reasons for optimism,” said Samson, noting the easing of global monetary conditions following tightening towards the end of 2018.

“The Fed is expanding its monetary base at a similar pace as in prior quantitative easing cycles,” he added. “While further rate cuts are dependent on downside surprises in data, the easing bias is firmly intact.”

This, said Samson, is feeding through into stronger US housing data and has also allowed every major emerging market central bank to lower policy rates.

And it has also been reflected in the more optimistic outlook suggested by Fidelity’s other indicator: its global Gauges of Economic Activity in Real-Time (GEARs).

While still at subdued levels, the latest reading of the indicator feels more positive than a few months earlier, according to Samson and colleague Jeremy Ocansey.

The Fidelity GEARs show that most developed markets are grinding higher from Q3 lows, according to the pair, even in Germany – which avoided a technical recession – and the US which has seem consumer spending drop off.

“But if the story in developed markets is one of incipient stabilisation the real excitement lies in emerging markets,” they said.

“Our emerging market aggregate remains comfortably above its turn-of-the-year lows, and continues to suggest stability.”

 

Source: Fidelity International

They added: “Markets seem to be betting not just on the stability that the GEARs now apparently confirm, but on a growth rebound into 2020.

Global geopolitics remain a tail risk for the global economy, according to Samson and Ocansey, but it remains hard for uncertainty to get “materially worse than the 2019 nadir – UK election and Democratic primary results notwithstanding”.

“For now, there seems to be enough in the global economic system to put a floor under a weak 2019 and maybe even give it a further kick into the new year,” they said.

“But structural headwinds combines with small output gaps in many key economies should curb our enthusiasm.”

“The cyclical outlook is something of a tug-of-war between the easing in global monetary conditions this year versus increasingly cautious Chinese policy support.

“On the latter, first-half stimulus should continue to support activity but China’s credit-hungry domestic economy may well start to weaken again if it isn’t fed some more.”

On the US-China trade war, Samson said it is something requires continued monitoring although – after several rounds of tariff escalation recently – there has been little sign of an impact on its Fidelity Leading Indicator, the risk of further damage to global growth should still be subdued.

Meanwhile, developed markets may also face some challenges.

“The US may struggle to accelerate even if the rest of the world picks up - as the boost from prior years’ fiscal policy reverses amid a mature credit cycle, tight labour market, and increasing election uncertainty,” he added.

“For developed markets in general, a lack of positive structural reform, labour market tightness, and limited upside to credit creation suggest that any acceleration may be more cyclical than secular.”

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