A closer inspection of export trends in the Asian region reinforces the message that global exports are at best flat, if not in fact trending lower. Japan’s export volumes have been flat-lining for over three years.  There are similarly disappointing trends in the likes of Indonesia and Singapore.  Further afield, the commodity-linked economies are clearly in peril, with Brazilian exports continuing their downward trend year-on-year.  Finally, export trends in Europe, having improved in the summer, have faded again in the likes of Germany and France.

The upshot of this is that the stimulus provided by China has faded, leaving the global economy highly exposed.  We have moved from synchronised global growth in the previous decade to a more fractured and slower world.  The implications for global traded goods prices in this brave new world are quite perilous, hence the recent utterings and actions from central bankers around the world.  For the first time in a generation, the West has an improved current account position and is no longer a net importer within the global economy.  The implications of this for the mercantilist model pursued by emerging markets (particularly Asia) are significant, as their economic models are predicated on a continuation of the status quo. Unfortunately, both Japan and China have seen significant adjustments to their current account balances as a result of the reduced level of exports since 2008, the very opposite of what both were seeking.

Simultaneously, a number of emerging markets have experienced mini-credit booms, financed by copious amounts of QE feeding their way into the capital accounts of emerging markets such as Indonesia and Brazil.  These booms have now turned into busts and as such there are a diminishing number of countries that are capable of reflating the global economy.  The UK is making its contribution via yet another housing-related credit boom, but weak wage trends limit the longevity of this impact. In reality, the bulk of countries around the globe have weak economies and poor export trends that are impairing their current accounts.  Their need for external funding of these economies has never been greater.  Those countries with surplus current accounts, like Germany, need to be encouraged to stimulate growth, which makes last week’s news that a balanced budget is still being sought disappointing to say the least.

The current response by individual economies is exemplified by Japan, which is playing the competitive devaluation game.  The new level of QE being initiated by the Bank of Japan makes the Federal Reserve look just that, reserved!  There is no rationale for this level of QE, other than to finally acknowledge the need to monetise their debt with the all the negative implications arising from a yen in freefall.  The spectre of competitive devaluations has never been more ominous and the intransigence of the surplus countries, such as Germany, and the rigidities of the North Asian economic model, guarantee that currencies rather than fundamental reform take the strain.  The most likely action from those in a position to respond is further monetary easing. We would look for both the Bank of China and eventually the ECB (after some more market pressure to step up) to stimulate again.

For those of us ardently imbued with the view that history doesn’t repeat, but, rather rhymes, this is all too familiar.  Asset price reflation has been a card played since the crash of 1987 and progressively, it has been embraced globally.

The Austrian school of economics would have the masses confined to the workhouses while the Keynesians believe you can always and forever manipulate the economic cycle.  Both are wrong.  The economic cycle of boom and bust exists because humans choose the path of maximum gratification.  The political cycle always decides the economic cycle and we are building unprecedented excesses.  Most risk assets are already priced at, or near perfection, at a point at which more stimulus is imminently due from around the globe.  The authorities were always going to overdo it.

The only thing investors must decide is whether they wish to participate in the last waltz……

Article written by Peter Toogood, Investment Director

Article featured in Professional Adviser Magazine (4 December 2014)