What global growth headwinds are investors focusing on?

Depressed bond yields are stoking institutional investor concerns over global growth prospects for the coming year.

“We’ve seen a similar pattern across the world,” said Alec Young, managing director of global markets research at FTSE Russell, in a webinar on Tuesday.

Alongside struggling yields, other leading economic indicators, including U.S. manufacturing data, have markets increasingly worried. However, growth expectations divided by country only predict a modest slowdown when comparing 2019 and 2020. In the U.S., one worry is the bifurcation of growth, with service sectors looking significantly healthier than manufacturing.

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Major uncertainties around trade are pushing manufacturing concerns higher. “This is about the negative impact on executive confidence, on business confidence, their willingness to make capital investments, all these negative headlines about trade.”

The good news, noted Young, is that the U.S. and China are attempting to hammer out a deal. It remains to be seen how well that process will go, and the results of the deal will have a serious ripple effect across global markets. The phase one deal involves China hopefully agreeing to buy a large amount of U.S. agricultural products over a multi-year period. Currently, the market seems comfortable with conditions, which appear to be deescalating, he said.

China will remain a huge part of the global markets story simply because of its size. The country was responsible for 16 per cent of global gross domestic product in 2018. “That’s why there’s so much emphasis on trade,” said Young.

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Notably, the nature of China’s stimulus package is changing, he added. A decade ago, it was overwhelmingly focused on government spending, specifically on infrastructure. Last year, however, tax cuts took on a much larger role, with an eye towards strengthening domestic demand and consumption.

While it’s essentially inevitable that China’s growth will slow, noted Young, the country is actively managing its economy to ensure growth will ease down slowly, avoiding a hard landing, which puts investors at ease.

As for inflation, expectations for the U.S. in the coming five years are relatively low. “That’s significant because it gives the Fed more scope to cut interest rates.”