Why the next global economic contraction could be only three years away

Added 19th July 2017

Seneca Investment Managers' chief investment officer Peter Elston has warned that the next global economic contraction could occur in 2020 and is cutting his equity exposure accordingly.

Why the next global economic contraction could be only three years away

Elston is basing his prediction on an extrapolation of current employment and inflation trends, as well as taking into account other factors such as structural slack in labour markets.

“The global economy has been strengthening, and we’re getting further into the current business cycle that began in 2009,” he said. “This cycle has already been longer than average, though to a great extent this is a function of the severity of the contradiction that preceded it – the worse the ‘accident’, the longer the recovery.”

Indeed, Elston said if his timing on the contraction in 2020 is correct - “the chances of which may be slim,” he adds - the current cycle would have lasted 11 years which is much longer than the typical cycle.

“As for asset allocation, we’re at the point in the cycle when equity returns should start to fall, albeit remain positive, and so we would anticipate the reductions in equity weights across the range of portfolios Seneca manages, that we have implemented in recent months, to continue for the next two years.”

In terms of severity, Elston said it is hard to say how severe the next downturn will be.

He added: “Some argue that it will be mild, because this time monetary authorities have the tools to prevent economic weakness causing stress in financial markets. Others argue that it will be more severe, because debt levels are now higher and central banks will have less scope to lower interest rates or expand already bloated balance sheets.

“Frankly, we do not know which is more likely, but are fairly confident that the next economic downturn, however severe, will see declines in equity markets. Through a sensible asset allocation framework we can reduce market risk and will strive to protect investors.”

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Adam Lewis

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Adam has been a freelance journalist and content editor since 2015. A journalist and editor with over 15 years experience, until 2015 he worked as editor of Fund Strategy for three years, and worked on the same title as deputy editor there seven years. Prior to this he was reporter at Investment Week.

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