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Investment Clock: Loose monetary policy fuels growth

by Trevor Greetham

Wed 8 Feb 2017

Investment Clock: Loose monetary policy fuels growth Enlarge Chart loading Image

Political risk will be a feature of 2017, as it was in 2016. The unpredictable nature of a Donald Trump administration creates uncertainty, especially if protectionist rhetoric starts to outweigh promises of stimulus. In addition there are the negotiations between the European Union and Britain over the terms of the latter’s leaving the bloc, and a series of important forthcoming elections in Europe. It would not be surprising to see red on the screens from time to time.

However, global growth is picking up and monetary policy is likely to remain loose in most developed countries despite an upturn in inflation. With the Investment Clock model supportive of stocks and commodities, dips can probably be viewed as a buying opportunity.

The Investment Clock, a model-based framework linking asset returns to different phases of the global business cycle (see chart), has been in the 'overheat' phase of the business cycle since July 2016. Things have heated up recently in what could potentially be the strongest surge in nominal growth since the financial crisis. Hopes of loose US fiscal policy and deregulation under Trump could add fuel to the fire.

Global growth remains above its long-run trend, as demonstrated by the continuing fall in unemployment rates across the world. Similarly, business confidence is picking up in all regions. Meanwhile, with China experiencing the strongest growth it has seen in years, inflation is picking up from a very low base and we expect this trend to continue.

In the overheat phase, commodities are usually the best asset class. However, with monetary policy likely to remain loose around the world, stocks should continue to do well.

Trevor Greetham is head of multi asset, Royal London Asset Management.