Much of the volatility in the performance of markets this year has surrounded the US Federal Reserve’s plans to curb its monthly injections of further quantitative easing. Its initial comments stimulated falls but the subsequent downplaying of previous statements and then postponement of tapering resulted in relief rallies.
The key development in markets has been the marked underperformance of the emerging world relative to that of the developed. As developed market economies have picked up momentum from a low base, a cyclical slowdown has simultaneously hit these emerging regions, resulting in capital flight and deteriorating fundamentals.
Whether these areas are likely to be the real losers when the Fed finally tapers QE is still uncertain but, if this is the case, it will result in global reverberations.
In an increasingly globalised world, we believe that three countries will define our fortunes, Japan, the US and China.
In China, a nation that has thrived from being the outsourcing capital of the world, one quote suffices to highlight the current situation. “From 2000 to 2010, wages in the Yangtze Delta, a manufacturing hotbed, jumped from 72 cents an hour to $8.62”. It is thus immediately apparent why the new Chinese leadership is so keen to re-orientate their economy towards a more domestically-biased one; their labour cost advantage has clearly gone.
What Japan (or more specifically the yen) does from here, is the key for many export-orientated emerging economies, as well as countries such as Germany. How do you compete with superior Japanese exports that are becoming more competitively priced?
The US, the ultimate export destination, is not out of the woods yet, but she has cleansed many of her past ills. America is growing but the cheap and available labour force, the potentially plentiful supply of energy (if indeed their shale reserves are the bonanza that many hope) and falling input costs, will be crucial for momentum to build.
It is fairly clear that we are close to, maybe even beyond, an inflection point in a number of global themes that have been in place for many years, if not decades.
The world has benefitted for over 25 years from a disinflationary tailwind from the emerging world, as the success of their cheap mass production has gone from strength to strength and resulted in a global trend of declining inflation and interest rates.
With interest rates at effectively zero in the western world and Japan, they can fall no further. This is not to say that interest rates are in imminent danger of rising, but declining interest rates and potentially falling bond yields are a thing of the past.
As the prospect for further developed world monetary intervention comes into question, this fundamental change in the macro economic backdrop should make all investors sit up and challenge their past assumptions.
John Chatfeild-Roberts is chief investment officer of Jupiter Asset Management