Hello and welcome to the Morningstar series, "Market Reaction." I'm Emma Wall and I'm joined
today by Schroder's Chief Economist, Keith Wade.
Hello, Keith.
Hi.
So, there are a number of different headlines which impact the global economy at the moment.
We've got disappointing Asian export figures, we've got gold price at five-year low and
of course, we've got rumblings from both the Fed and the Bank of England about rising interest
rates. In order of importance, how would you number those?
Well, in terms of those headlines, I would probably say the least important in many ways
is the gold one because I think that's reflecting changes that have been going on for some time.
I think the gold market got a long way ahead of itself when it was really very strong in
the early days of the crisis. But what's been interesting is that gold didn't really respond
to the Greek crisis in the way that you would have thought gold might have done because
people obviously when they worry about currencies, they think, well, what's an alternative, I'll
hold some gold and it didn't really rally. Now, that's all quiet and down. People are
searching around for reasons why gold has fallen and I think it's just a reflection
of the fact that it's on a bit of a downtrend for some time and the Greek crisis may have
provided a bit of support, but now that's fading away, gold has come down. And from
a macro perspective, I don't think gold is that important. So, I would probably put that
as the least important, the one that investors probably don't need to worry about that much
in terms of the outlook.
It was a flight to safety during the credit crisis. Gold was sort of for you it is going
only one way, but as you say now that's perhaps no longer the case. If that is the least important
in terms of macro impact, what's your middle story?
Well, it would probably be the Asian one actually, the Asian exports, because Asian exports are
quite a good indicator of global growth and of course, they have been pretty weak actually
for most of this year. Now, we've been looking at this very closely and some of it relates
to the problems in the U.S. in the first quarter in terms of the weakness of activity and the
doc strike and so it was a very distorted picture.
So, the latest numbers haven't been that good, but one or two signs that exports to the U.S
are beginning to pick up. So, looking at Korea, for example, beginning to show a bit of signs
of life. And because we believe that the U.S. economy actually will continue to improve
over the course of this year, we'll be looking for some further progress on that. So, Korea,
we want to see that expanding across sort of Taiwan, China, and the others. The Chinese
export numbers look a little bit better as well actually. So, I think that's an important
story, but I think it's beginning to turn now, maybe beginning to look a little bit
more positive for Asia as we move through the second half of this year.
And that just leaves policy left, U.S. and U.K. talking about rising interest rates.
We've had the U.K. say that perhaps Christmas, New Year time, the Fed similar sort of time
scale. Is this something that we should be concerned about, both on an economic level
and as individual investors?
Well, this is the most important story because we are getting to a point where we're going
to get a turn in monetary policy, the first interest rate increases for five or six years.
It's a signal I think that the world economy, well, certainly, the U.S. and U.K. economies
are getting back to normal and they don't need to have interest rates at these very
low levels. So, that's the good news. But, of course, as investors we know the periods
of higher interest rates are always accompanied by higher volatility in markets. So, we've
got to be a bit wary of this and we've got to consider how quickly they are likely tighten
and how fast and how far they will raise interest rates as we go into 2016. So, that's the new
theme that people will be talking about more and more and the latest minutes from the Bank
of England suggests that yes, they are on track to raise rates then.
Before that we will see probably a rate rise from the Fed in September. That's our central
view and that's going to be really important for investors. I think in many ways the Fed
will be the leader in this cycle. Bank of England and Mark Carney will be looking very
closely. If the Fed move in September that will probably open the door for them to move
towards the end of the year or early in 2016. So that will be the important thing and markets
will experience some volatility. We will be looking very closely not just at the impact
on the U.S. and U.K. but also wider than that because if you remember in 2013 when we had
the taper tantrum we had quite big impacts in the credit…
Or the Fragile Five…
Yeah, the Fragile Five in emerging markets and the credit markets. It looks to us at
the moment the markets are a little bit better prepared. Back in 2013 there was talk about
quantitative easing going on forever. Of course, that has changed now. The Fed stopped doing
QE some time ago. So, maybe the volatility won't be quite as much but I will be surprised
if there wasn't any volatility and there are some emerging markets I think as still quite
vulnerable. So, that's the important story for investors.
Be prepared.
Yes, exactly.
Thank you very much.
Yeah, thank you.
This is Emma Wall for Morningstar. Thank you for watching.