The global economy is improving, but investors must avoid complacency as the risks associated with US trade policy and its effects on emerging markets increase, according to Standard Life Investments.
Global activity is picking up and supporting corporate earnings growth, the company said, and fears of deflation are beginning to subside due to improving headline inflation rates and commodity prices.
“Meanwhile, other than the attack on the Mexican peso, market participants have so far shrugged off the potential for the trade policies of the incoming Trump administration to weigh on global growth, instead choosing to focus on the benefits of possible corporate tax reform and broader US fiscal easing,” the company said.
Despite the improved economic conditions, Standard Life Investments cautioned that “investors need to be wary of complacency”, noting that the current global manufacturing cycle was being led by emerging markets off the back of China’s stimulus efforts, and that President-elect Donald Trump’s proposed policies could undermine productivity and corporate margins, putting investors in “an unusual position”.
“On the one hand, the recent run of strong data suggests that there are upside risks to our global growth forecasts for 2017,” the company said.
“On the other, left-hand tail risks are also clearly higher. Trump’s first 100 days in office, together with the early year Chinese credit figures, will tell us more about which force will win out.”
Investors should also watch for developments in US-China relations, the company said, as “tensions are running high” in several areas, including trade.
“Investors would be wise to take the threat of protectionism seriously,” the company said.
“While it is unclear how far Trump’s team will go in changing trade policy, it is also unclear how other countries would react, particularly an emboldened China. Chinese official press have denounced the threats of across-the-board tariff increases and indicated their intention to retaliate.”