BNP Paribas Asset Management

The past few months have been dominated more by politics than economic news. A new government with a radical agenda has formed in Italy, triggering a seismic re-pricing of ‘peripheral’ eurozone sovereign bond spreads. Meanwhile, an established government was toppled in Spain, but the market barely blinked.

Following a volatile last few months, we foresee a pause and potentially a reversal in some of the prominent trends. In particular, we expect US Treasury (UST) yields and the US dollar to stabilise in the near term, as we believe UST yields have already priced in good news in terms of growth, inflation and monetary policy tightening by the Federal Reserve. By contrast, growth in the eurozone economy has slowed, but the ECB has signalled its intention to end its asset purchase programme by the end of 2018.

The way financial markets have moved over the past three months is a good example of the new and more challenging environment. Equity performance was mixed with positive returns in the eurozone, followed by the US, and EM equities trailing with negative returns.

The world’s two most populated countries, China and India, are also two of the worst air polluters. However, China is already using central government policy to drive through the transition to a cleaner energy balance, although it needs to extend its efforts beyond the industrial Northeast. Meanwhile, unlike China’s centralised approach, India’s fractured governmental structure will make the transition tougher, not least given the number of coal jobs in question.

Small and medium-sized enterprises (SMEs) are a vital component of the UK economy. They represent over 60% of private-sector employees and are recognised as a critical component of both innovation and economic growth. The essential problem for potential lenders to SMEs is that the investible universe of UK SMEs is enormous – involving some 5.7 million companies – and yet the credit approval process is the same for a GBP 500 000 loan as for a GBP 50 million loan.

When leading central banks stop playing the monetary policy tunes that many financial markets have been dancing to over the past decade – that jaunty ditty called quantitative easing, or QE as it is known by its abbreviation – the financial assets that were the winners under QE look set to become the losers, but there is one asset class that should continue to hum along nicely: US mortgage-backed securities (MBS), as fund manager John Carey explains.

The Green Bond Principles define a green bond as any debt instrument whose funds are meant to finance or refinance ‘green’ projects, that is, projects with the ultimate goal of combating climate change or mitigating its impact.

Valuing capital, be it cash, machinery or even human, is a mainstream practice, but viewing the natural environment in the same way is less common, even though impacts upon natural capital can have equally far-reaching consequences, including for investors.

A recent report by nutrition experts from Brazil and Canada concludes that the ever-increasing production and consumption of ultra-processed foods such as sweet or savoury packaged snacks, reconstituted meat products and soft drinks is threatening increased obesity. Not only that, it is also leading to sustainability crises such as the degradation of land and water resources, waste caused by mass animal husbandry, and food and nutrition insecurity.

Our general economic outlook for the rest of 2018 is for continued global growth with low but rising inflation worldwide. In this scenario, we expect major developed market central banks will gradually reduce the extraordinary level of liquidity in financial markets. There are risks of a sudden and unexpected rise in inflation and of trade tensions worsening into a wider trade war.