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In the United States, the current trade tensions have had little effect on economic growth, whereas in China trade frictions with the United States are starting to have an impact. This the view of Guy Wagner, Chief Investment Officer at BLI - Banque de Luxembourg Investments, and his team, in their monthly analysis, ‘Highlights’.

Trade tensions between the United States and China continue to dominate the economic headlines. In the United States, they have had little effect on growth. The economy is robust, buoyed in particular by the strength of corporate investment and fiscal incentives. “Although household spending has not accelerated, consumer confidence indexes are approaching the record levels seen in the year 2000”, indicates Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI - Banque de Luxembourg Investments. In China, however, trade frictions with the United States are starting to impact economic growth. “The Chinese government has introduced monetary and tax support measures to boost economic activity.”

 

In many emerging markets, interest rate rises will affect their economic growth

In Europe, high growth rates at the end of last year are normalising, without heralding a significant economic slowdown. In many emerging markets like Turkey, Argentina, Russia and Indonesia, interest rate rises designed to shore up their currencies will affect their economic growth in the coming months.

 

The bond markets continue to be challenging

Favourable economic statistics in the United States nudged the 10-year US Treasury yield over the 3% threshold. In its wake, the Germany 10-year yield also increased. Fears of fiscal slippage by the new Italian government kept the Southern European bond markets under pressure, with Italy’s 10-year government bond yield above 3%. “The bond markets continue to be challenging”, states the Luxembourgish economist. “For a European investor, the interest rate differential between US and European bonds is absorbed by the costs of hedging the dollar exchange rate risk.” Eurozone bonds however are not an attractive alternative, as yields (apart from those of Greece or Italy) remain pitiful.

 

Technology, healthcare and oil are posting the best performance since the start of the year

Equity markets were relatively stable in September. Geographically, Japanese equities stood out. The S&P 500 in the United States and the Stoxx 600 in Europe gained marginally, while the MSCI Emerging Markets gave up slightly. Guy Wagner: “In terms of sectors, technology and healthcare – incorporating a host of ‘growth’ companies – and oil, on the back of the oil price rise, are posting the best performance since the start of the year.” Now that US real interest rates are returning to positive territory following the Federal Reserve’s gradual monetary tightening, dollar-denominated money market and bond investments are once again becoming (at least for US investors) an alternative to equities, without risk of immediate erosion of purchasing power.

Guy Wagner, Managing Director

An economics graduate from the Université Libre de Bruxelles, Guy joined Banque de Luxembourg in 1986 where he was head of the Financial Analysis and Asset Management departments. He was appointed Managing Director of BLI – Banque de Luxembourg Investments in 2005.

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