Dawie Roodt, chief economist of the Efficient Group, has shared some opportunities and potential risks that 2019 holds for the world, South Africa, and your investment portfolio.
In a note sent out to clients on Monday (14 January), Roodt and his fellow Efficient Group economists said that there are two broad trends that investors should be aware of.
“After more than a decade of global economic growth and a record-breaking bull run on most financial markets, tighter monetary policy from the major central banks and disrupting political developments in recent years could derail this streak of happiness,” said Roodt.
“With regards to political developments, the escalation of the war on trade between especially the United States (US) and the rest, as well as other political events like Brexit and a swing to the right in many countries in the world come to mind.”
Roodt said that while US president Donald Trump has the potential to do significant harm to global growth, there are many examples where trade has, in fact, become freer.
“With some luck, we could see a world with less protectionism than what the current narrative suggests, but beware, the danger of protectionism remains,” he said.
“The second international trend, which is of more concern to me, is the current and future tightening cycle of monetary policy by the world’s major central banks,” said Roodt.
“I am concerned about two aspects of the reversal of easy money by, especially, the Fed.”
The economist said that there was a real danger that central banks can get their timing wrong and overdo their tightening.
Roodt said that he was also concerned that the United States’ Federal Reserve, and the others like the European Central Bank and eventually also the Bank of Japan, are using two monetary policy instruments to tighten policy – namely interest rates and quantitative tightening (QT).
“Interest rates are the traditional instrument to conduct monetary policy but after many years of quantitative easing (QE; buying of financial instruments by central banks after the financial crisis), the Fed is now of the opinion that these transactions should be reversed,” he said.
“In effect, massive amounts of liquidity will be withdrawn from the world’s financial markets and that should not be good for financial markets.
“This is potentially the biggest danger to the world’s economy and financial markets.”