Pencil in 2019 for the next economic downturn
Our friends at CrossBorder Capital have released end June liquidity data and it shows the same very tight conditions as we have highlighted for three months. They normally - I hesitate to say always - presage a significant downturn in risk appetite and markets, and then economies. The overall liquidity index is 17.3 (range 0-100) but that hides a more positive picture for Emerging Markets (58.3) than Developed ones (12.7). The former appear to be letting their currencies weaken rather than tightening monetary policy in line with the US Federal Reserve.
Investors’ appetite for risk also appears to have declined, albeit the confidence collapse is largely within Emerging Markets and specifically China. This tallies with our anecdotal evidence, where many western investors we speak to remain invested in largely DM risk assets in the short term, despite their worries about the longer term. Our own view is that there is a lot of complacency around after nearly ten years of rising markets, and we are firmly in the ‘Risk Off’ camp right now across the board.
With the liquidity cycle clearly in a downward trend and the risk cycle looking like it has peaked, we would expect the economic cycle to follow and peak quite soon. We are therefore somewhat sceptical that the train of rate increases envisaged by the US Federal Reserve will all happen. If they do, we suspect they will prove the exogenous shock needed to precipitate a change in market direction and economies will slow sooner rather than later. Either way, we now have visibility of how the next economic downturn happens and, increasingly, when. Pencil in 2019.
To purchase the full CrossBorder Capital report with the end June liquidity highlights, please click here.