The law of diminishing returns

Central banks to the rescue. We warned three months about a flock of doves re-turning to the markets. Their return has proved bullish for corporate bonds and equi-ties, as we expected, and vindicated our recommendation to cut exposure to cash.

  • Investment View

Highlights:

  • Central banks are about to press the ‘easing’ button again. But the likes of the ECB and BoJ are facing the law of di-minishing return, i.e. it is not clear that their actions will effectively re-anchor inflation expectations at higher levels. If, by cutting rates to negative and buying loads of assets they have not succeeded, why would they now?
  • With bond yields going lower for longer, investors too face the tough reality of diminishing returns. A record amount of bonds trade below zero (YTM), and the hunt for yield is raging. Except for those predicting a global downturn – we don’t – the investment choices are clear: equities and credit remain preferred habitat.
  • Most importantly the US economy is starting to wobble. This is both a concern and a blessing. As President Trump realises that tariffs are causing self-inflicted pain, he is likely to turn less aggressive as he prepares for the US presi-dential election, in just a bit more than one year. This, and reflation policies, should keep the global economy afloat.
  • If tariffs don’t work, why not trying a currency war? We are bearish the USD, and that should be good news to EM markets.

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THE LAW OF
DIMINISHING RETURNS
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