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Global Debt: Quarterly Macro Update
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Developed Market Contributions to Global Growth
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Asia’s Contribution to Global Growth
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Emerging Markets’ Vulnerabilities Have Been Declining
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Portfolio Implications
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Developed Markets’ Contributions to Global Growth

We foresee the continuation of broad-based economic growth worldwide, with most countries at or close to their full potential and reducing the slack in their economies. U.S. fiscal stimulus has been the new development this year among developed economies—one that we believe will contribute to global growth this year and next.

At the same time, the heightened growth momentum we witnessed in previous quarters seems to be reaching a plateau.

Asia’s Contribution to Global Growth

Whereas before, global growth among developed and emerging economies was at a synchronized clip, we seem to be witnessing a growing differential between those two groups: Emerging markets—especially in Asia—have been falling behind their developed counterparts.

Growth appears to advance at a healthy clip in such countries as India, Indonesia, Thailand, South Korea and Singapore. However, since China’s growth rate appears to be decelerating—a trend that we expect will continue—we do not foresee a major contribution to global growth on Asia’s part as a whole. In other words, among the BRIC countries, we believe Brazil, Russia and India will contribute more significantly to growth than China, barring any upside surprises.

In addition, we believe that the prospect of a trade war through tariffs could hurt emerging market exports to some extent and presents a risk to growth.

Emerging Markets’ Vulnerabilities Have Been Declining

Emerging markets are much healthier than in previous years: Their current-account deficits have declined for the most part, thus allowing inflation and interest rates to normalize. Capital flows have followed and allowed emerging market currencies to hold their ground. As a consequence, the main risk to investment returns may come from currencies rather than inflation.

In Latin America, we see political risks but believe growth will continue to improve. For example, the upcoming Mexican elections this year are a pivotal event that could shape economic prospects for the country, though we maintain our constructive view thus far. And in Brazil, we believe economic reforms will continue, as will growth.

Portfolio Implications

Our overarching outlook for the global economy hasn’t dramatically changed from the previous quarter when addressing the three questions that inform our portfolio and risk allocations:

  1. What is the breadth of growth globally?
  2. What is the depth of this growth?
  3. Is this growth policy driven or self-sustaining?

The breadth of growth continues to be extensive for the majority of countries, with particularly strong growth in Europe and emerging market countries such as China and Mexico.

The depth of this growth remains robust, with all levers—such as investment, consumption and trade—contributing to growth. We see the impact of policies as muted—and we observe a shift toward less accommodative monetary policy. This, in our view, is a good outcome for global economic conditions: Growth remains at high levels and is showing signs of plateauing.

The risks to our analysis have changed slightly, with increased trade tensions and an elevated risk that U.S. inflation could surprise on the upside and potentially lead to increased volatility. As a result, our portfolio looks similar but with small changes: We expect to run our portfolio at a lower duration,1 with the majority of our interest rate risk coming from emerging markets. Inflation expectations continue to drop in emerging markets, resulting in high real rates. We continue to favor rates (i.e., government bonds) in India, Brazil, Mexico, South Africa and Indonesia.

From our standpoint, economic conditions in the medium term—over the next 12 to 18 months—continue to favor foreign currencies over the U.S. dollar. We expect our exposure to foreign exchange to remain stable, but with an emphasis on the euro and the yen.

Countries worldwide continue to be rich with credit. However, economic conditions are favorable in Europe and emerging markets, with companies in those regions continuing to deleverage.

  1. ^Duration measures interest rate sensitivity. The longer the duration, the greater the expected volatility as interest rates change.