Gauging Global Growth in 2020
Lord Abbett: The Investment Conversation
Gauging Global Growth in 2020
VO: Welcome to The Investment Conversation, Lord Abbett’s ongoing podcast series.
Will Andrews: With the end of the year approaching, we thought we’d switch things up for our final Investment Conversation podcasts of 2019. In this special three part series, Lord Abbett investment leaders will have one-on-one discussions about key themes for the coming year—sharing investment insights and ideas directly with our audience.
In this segment, part two of three, Lord Abbett director of strategic asset allocation Giulio Martini and Leah Traub, portfolio manager and currency specialist, will share their insights on the U.S. and global economies and the direction of the dollar and the euro. Giulio kicks off the discussion with a question for Leah.
Martini: I think the currency markets are usually seen as kind of one of the more difficult ones to invest in successfully. So has 2019 so far been a harder year than usual, or a normal year as far as you're concerned? Has there been a dominant theme or is it just a lot of different stories when it comes to currencies?
Traub: The currency markets have been interesting this year. They've been a little different than I feel like last year [or in] years past. And it really is because everyone came into the year thinking the [U.S.] dollar has to weaken because the Fed [U.S. Federal Reserve] is now going from a hiking posture to an easing posture or, at the beginning of the year [the dollar] was up high, then it was easing.
So [according to this line of reasoning] therefore U.S. interest rates are going to have to come down and compress with global interest rates. And that has traditionally weakened the dollar. And we did not see that at all. We didn't see that for a number of reasons.
One is, I think, [that] all global central banks moved to an easing posture. So that was I think one dominant theme that we did see in the global markets, that central banks went from hiking in 2018 to easing in 2019. But it was a global phenomenon. All central banks were doing it. So currency markets were not hurt by the central bank easing because everyone else was doing it too. So just because the ECB [European Central Bank] decided to do more easing, sure, it weighed on the euro a little bit, but not nearly as much as it did when they first started easing in 2015. And emerging markets too, a lot of them took the liberty to reduce interest rates and were rewarded for doing so. Turkey's currency was appreciating even though its central bank reduced interest rates by about 700 basis points.
So interest rate differentials were not driving currency markets. And what really seemed to driving currency markets was the global growth dynamic, and really, growth expectations. And since the U.S. was holding up much better than the rest of the world, we saw the U.S. [dollar] appreciate. And in the emerging market space, the currencies that ended up doing the worst were those that were most tied to China, to the trade tensions that we had.
Now going forward to 2020, again, global growth I think is going to be key in terms of what happens to the currency markets and in terms of whether the rest of the world can catch up to where the dollar has been. So Giulio, I'd love to know your thoughts on where you see global growth--and what do you think about this whole U.S. recession narrative?
Martini: I think global growth is going to improve. You know, in 2019 we really had two things driving global growth below trend. One was a credit tightening in China that was implemented really to reduce financial risk-- to take back some of the overleveraging that had happened in prior years to sort of start to deny credit to industries that had developed a lot of overcapacities, to cities where there had been over-construction of housing, and to try and really redirect it to parts of the economy which did not have those problems.
And of course in slowing down credit growth overall and in redirecting credit to different places, there's always going to be a period of economic slowdown associated with that. But one of the things that I think will improve growth in 2020 is that China started to really ease off on some of those policies around mid-year  and really be a little bit more generous with credit provision.
And we've seen that start to turn credit growth slightly higher, which should start to show up in economic growth in the first half of 2020. And that's critical because global economic growth is so heavily influenced by what's going on in China. I don't think people fully appreciate just how much it is--40% of [global] economic growth over the last 10 years on average has been driven by China alone. That's in dollar terms. It's even bigger in terms of changes in standard of living.
So China's just really tremendously influential, more so than I think any other economy really at this point in time. The other thing that I think is really going to help 2020 versus 2019 is that some of the effects of trade conflict are going to start to die down.
So I think we'll see better business investment spending broadly. And that'll help trade pick up as well because so much of global trade is in capital goods. And that has different implications for different economies. I think one of the countries that's really been hurt by the dynamic from 2018 into 2019 was Germany. So that's something I'd like to ask you. The European Central Bank was one of the central banks that eased policy along with the Fed this year. And so the euro had that sort of movement vis-à-vis the dollar where the two central banks were easing policy in the same direction. But if we started to see a pickup in Germany that filtered through into Europe as a whole, would that be helpful for the euro and the ECB?
Traub: I think it should be helpful for the euro. I do think the euro has already priced in a lot of the easing that we're going to see. [The ECB has] already started repurchasing government bonds and corporate bonds onto the balance sheet.
They have already gone pretty far negative into their interest rate policy. I don't think they want to go too much further, although they can if they need to. So I actually do think that if we do start seeing signs of life—and we're starting to see a little bit of bottoming out, I think—as some of these trade tensions start mitigating a little bit or being on pause a little bit … I think we're starting to see that a little bit.
But we really do need to watch the data and see the hard data really start picking up in Germany especially. I mean, [its economy is] so manufacturing-driven and, has been such a big causality [of trade conflict]. So I do think that will help the euro.
Martini: So that just adds up to a little bit better 2020 over 2019. And I think investors [have been] so pessimistic. A little bit of that pessimism has started to go away in the last couple of months of this year. But before this, cash levels were as high as they had been since 2008, 2009. And bond yields had been bid down to very low levels again. There were a lot of signs that investors were looking for safety. And so I think it would really be quite a surprise if things turned out to be better than expected rather than worse than expected.
Now the kind of overall pessimistic mindset is something that I think comes out of the fact that things have actually been good for a very long period of time. I mean, the U.S. is the best example of that because we're in the longest economic expansion in U.S. history. And that sort of attitude breeds what I'm calling “end-of-cyclitis” where everybody's looking for the peak month and for the economy to roll over into recession. They're looking for the vulnerabilities that might create that.
There's no clear recession narrative that's out there that's actually starting to play out. So I think people have started to make one up. And the one they made up was: trade and tariff tensions are going to lead to a slowdown in capital spending as businesses try to adapt--and we have actually seen that happen--but that would then lead to a slowdown in employment. And as employment slowed down, consumer confidence would be hurt. And as consumer confidence rolled over, consumer spending would roll over as well. And that would take us into a recession. That's really not a sequence that we've seen in the past leading into a downturn, but people are looking for a downturn kind of narrative. And it kind of sounds logical.
So, you know, [investors have been] seeking out the next downturn because of the feeling that things just can't keep being as good as they've been, the economy can't keep growing, the stock market can't keep going up. I think this is something we're going to have to deal with more or less until the next downturn actually happens.
Andrews: That’s it for this special edition of the Investment Conversation. For those who listen on iTunes, please be sure to leave a rating for the Investment Conversation. Thanks.
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Additional disclosure for this podcast:
ECB refers to the European Central Bank.
Fed refers to the U.S. Federal Reserve.
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