Macro Matters is a global investment blog brought to you by LGIM’s Asset Allocation team. We’re focused on sharing our most compelling thinking to help you become more informed investors.
When making decisions, data on similar past decisions and their outcomes provide a useful starting point as a ‘base rate’. Too often though people ignore them or give them too little weight. Base rates of the historic performance of active fund managers provide an insight into the potential benefits and costs of choosing them in different asset classes.
It’s easy to build a buy case for European equities at the moment. The economy is booming, earnings are growing, politics look as stable as they have been for years and the European stock markets have lagged behind for so long that surely it’s time for some catch up? But perhaps constructing this buy case is a bit too easy?
With the Fed and ECB unwinding QE, what happens when we come off the meds? There are signs that the patient (the economy) has healed, suggesting limited withdrawal effects. While addiction and placebo effects could still increase risk premia, low inflation reduces the risk of going ‘cold turkey’.
The BoE is in a difficult spot. Lower trend growth and a weaker pound mean that if it doesn't hike rates, inflation could remain above target. But if it raises rates too fast, the economy could be hurt should downside risks materialise.
US wage inflation remains subdued. Many believe this is due to workers' fears about automation and offshoring. Yet US consumers believe jobs are 'easy to get' and companies struggle to find labour. This contrasts with Germany in 2004 when the EU expanded eastwards. So second-round effects from low oil prices and ageing demographics appear more plausible explanations.