With record highs being reached on global equity markets, including our own JSE, it’s quite extraordinary to hear Christine Lagarde, the head of the IMF, warning about the new low growth environment becoming “the new reality”.
With economic growth slowing significantly in China and the Eurozone stuttering along with its Central Bank seemingly totally pre-occupied by the Greek situation, it is surprising that markets have been so buoyant. However, capital needs to find a home, particularly in the current low interest rate environment.
It is most likely the issue of interest rates which is fundamental to where markets may be headed in the foreseeable future. Specifically, the US Federal Reserve may trigger a correction in equity markets globally when it eventually decides to embark upon what it terms “the normalisation of rates”. The question is when? With US resurgent growth since the financial crisis having slowed a little and still no sign of inflation anywhere, the expected increase predicted for June may be put back. What’s more the strong US Dollar might mean that a rate rise in the near future is unlikely. If any or all of these factors change, then we might well see increased interest rates which, depending on the extent and pace of such increases, might well result in the anticipated correction in global equity markets.