In this special episode of the World Financial Podcast, Brian Levitt is joined by Krishna Memani, the CIO of OppenheimerFunds, to examine the state of the global economy and financial markets in 2019 and beyond.
Below are a few highlights from the episode:
[3:00] Volatile Markets and the Fed: Volatility returned to the fray after a benign 2017 for the markets. The fact that volatility almost disappeared in 2017 signaled that some uneasiness loomed. Some of that uneasiness stems from the Federal Reserve’s (Fed) stance on interest rates, progress on trade issues, and other broader economic factors. The Fed, in Krishna’s view, remains too concerned with the Phillips curve, which says low unemployment translates to higher wage growth. “We could have made the same claim at 5%, that an unemployment rate of 5% should lift wage growth as well. But it didn’t,” explains Memani. He also views the Fed’s desire to create a cushion in rates ahead of a potential recession as problematic. “I don't get that logic. They would rather have policy rates at 2.5%-3% so that in a recession, they can cut it down to zero again,” he says.
[11:30] A Soft Landing for the U.S.: As U.S. growth converges with the rest of the world, the stage is set for international stocks to rally in 2019. Memani expects this to happen for two reasons: valuations in international markets are in a better position than they are in the U.S. and growth potential in the U.S. has slowed down. That said, the entire world is dealing with policy issues that could impact markets. The U.K. has Brexit, Italy has a debt crisis, and India has a central bank problem, to cite a few.
[22:00] Slow Growth Environment: Places which experienced rapid growth, emerging markets, for example, have now seen growth level off. What’s more, the inflation picture around the world looks materially different. All that weighs on asset prices, according to Memani. But this doesn’t mean value stocks will come back into vogue. The current environment, with a modestly flat yield curve, continues to favor growth-oriented companies.
[31:00] How Does the Cycle End?: “I think if we have a recession, it would be because of a policy mistake rather than an economic bubble bursting because growth ran rampant,” according to Memani. We don’t think that point is next year but much further in the future. Maybe three, four, or even five years from now.
[38:00] What Worries Krishna: The political issues are more concerning than perhaps economic policymaking. “The Fed is going to stop [raising rates] because those are rational economic entities and they will see the writing on the wall,” he says. It’s more uncertain what happens with the trade war, Brexit, and other geopolitical events. Any of those things could impact the dollar. And for the cycle to end, the dollar must appreciate meaningfully, according to Memani.
The Q & A session begins at the 40-minute mark
For more, listen to the full episode, 2019 Outlook: A Soft Landing for the U.S.
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These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.