Bleak was the message from the IMF this week. Global growth this year was downgraded to just 3.3% versus 3.5% in July and 2013 is forecast to be a tepid 3.6% versus July’s expectation of 3.9%. Drilling down, the details for selected countries are also poor: UK growth this year was slashed from +0.2% to -0.4%, whilst over in Spain, debt: GDP was revised up 10% to close to 100%. Across the pond the US deficit was revised down by 1% or so and debt: GDP up by a couple of percentage points.
All this begs the question whether central banks are pushing on a string? So far, the impact of a quite extraordinary amount of stimulus, both conventional and unconventional, seems to be having little impact. A theme validated by our own leading indicators which point to sluggish growth going forward.
Perhaps, though, we are now moving to a new phase where central banks are directing credit much the way they did during the war. QE ‘infinity’ in the US does that by unlimited purchases of Agency mortgages, the Funding for Lending Scheme in the UK aims to directly push credit to households and the purpose of the ECBs Outright Monetary Transactions is to channel finance directly to distressed sovereigns.
Where does this leave bond markets? Well, probably a little bit like Jarndyce vs Jarndyce*. There will be twists and turns as central banks continue to experiment with tools to shake economies out of the current malaise, but the real message is, as highlighted by the IMF, that deleveraging takes time. This process remains one where the conditions for fixed income are ideal. Negative real returns force investors out of cash and into fixed income securities as they hunt for yield and inflationary pressures remain subdued. We are looking to add more credit risk on any back up. Although, it’s as well we don’t follow Jarndyce vs Jarndyce too closely. Remember how it ends: it’s a case that took generations to resolve and, of course, when it was…the pot was empty.
*Charles Dickens aficionados will recognise this as the interminable and protracted court case that forms the heart of ‘Bleak House’