Inflation - not such great expectations

Wherever you look around the developed world, inflation expectations are falling dramatically. The turnaround since 2016 is remarkable, with the optimism that greeted the election of Donald Trump evaporating as his promises of deregulation, tax reform and infrastructure spending have morphed into the pessimism of protectionism and trade tariffs. In the two regions of the world where disinflation is most entrenched - Japan and Europe - investors are now factoring in price falls again within the next two years. In the UK and US, central bank price targets look increasingly unattainable. For those of us brought up in an inflationary era, stable prices feel instinctively like a good thing but after years of monetary stimulus it is worrying that expectations are so subdued. Central banks seem to be ‘pushing on a string’. As investors we face an extended period of lower for longer interest rates.

Source: Refinitiv as at 26.06.19. 2Y, 2Y Forward inflation expectation (expected inflation over 2 year period, starting in 2 years).

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Please be aware that past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. 

Trade wars - no easy wins

Trade tensions continue to have a negative impact on sentiment. The performance of stock markets over the past year or so has been closely tied to the ebb and flow of the on-off negotiations between China and the US. What is only just becoming apparent, however, is the impact of the dispute on actual economic activity. For example, shipments of goods captured by the first tariffs, on $50bn of Chinese exports to the US, have fallen by 30% compared with a year ago. Those on the subsequent $200bn are starting to follow suit. This chart shows the broader impact on manufacturing activity. A reading above 50 shows expansion while contraction is indicated below this level. Fortunately, making and exporting things delivers a smaller contribution to overall growth than it used to. But few will agree with Donald Trump’s belief that trade wars are winnable - everyone loses when countries retreat into isolationism.

Source: Refinitiv, 15.5.19.

Please be aware that past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall.

Investment returns - looking on the bright side

There is a well-known investment adage that says: ‘don’t fight the Fed’. The performance of the main indices so far this year confirms the wisdom of that saying. The New Year marked a turnaround in the Federal Reserve’s approach to monetary policy and the market response was almost immediate. The dreadful investment performance of the last three months of 2018 turned on a sixpence at the start of 2019 and, while things have slowed somewhat in the second quarter as trade tensions intensified, the power of the US central bank to bolster sentiment has been remarkable. Whether you have been in shares, bonds or property, it’s been a good time to be fully invested. Of course, the Fed needs to follow through now. Expectations of lower interest rates during the rest of the year are now firmly baked into prices. The scope for disappointment is significant.

 

 

Source: Refinitiv, 26.6.19, Returns year to date.

 

 

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall.

Five year performance          
(% as of 30 June) 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Japan 10yr 4.1 5.7 -1.9 0.6 2.2
UK 10yr 9.0 14.4 -0.8 1.6 7.6
Germany 10yr 5.3 11.1 -4.4 3.4 8.0
Japan 35.7 -22.1 30.3 10.9 1.9
US 10yr 4.5 10.6 -5.7 -2.4 11.1
UK 3.1 1.8 17.6 7.1 3.4
US 7.3 3.5 17.9 14.5 11.2
China 90.0 -25.1 9.0 -13.2 9.7

Source: Refinitiv as at 30.6.19. In local currency terms.

Important information

Please be aware that past performance is not a reliable indicator of what might happen in the future. The value of investments and the income from them can go down as well as up, so you may not get back what you invest. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in small and emerging markets can be more volatile than those in other overseas markets. Reference to specific securities or funds should not be construed as a recommendation to buy or sell these securities or funds and is included for the purposes of illustration only. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a personal recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.

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