Global economic slowdown has taken hold, says Fidelity’s Greetham

The head of asset allocation Fidelity International, Trevor Greetham, believes we are in the midst of a global economic slowdown which will continue through to next year unless a policy u-turn is introduced soon in the world’s leading economies.

While recent events  - the market sell-off and the US rating downgrade -  have had profound effects on the global markets, he says the slowdown was apparent before they occurred.

‘The month of May appears to have been the peak in global growth cycles. It will only become clear in six months time but we can already see it in initial numbers,’ said Greetham, who also runs the firm’s multi-asset funds.

‘When you look at the technical indicators, you see that market trading over the last few weeks has been alarming.’

‘After the second ECB bail-out for Greece was released I thought there was going to be a rally in the markets: it lasted all but two hours. This is a sign there was a slowdown process already in place. The market is reacting badly to good news and that’s why we moved to more defensive positions.’

He is now underweight equities and commodities as well as cash while he is overweight bonds, gold and property.

According to Greetham, it is a 50-50 case whether we will see more growth and more inflation rises. But he does believe that increased monetary policy could bring about the stimulus required to help boost global economies.

Referring to the work of economist John Maynard Keynes, he said we need ‘loose monetary and fiscal policy’ and that continuing cuts in government’s budgets won’t work or be enough. ‘By printing more money they [governments] could help fund fiscal growth,’ he said.

Looking toward the US, before the Fed decides to carry out a new round of quantitative easing (QE), certain market conditions would have to be in place, he said.

‘The Fed views the QE2 as a success but would need temporary slowdown to become permanent and inflation to drop before pulling the trigger on QE3.’

‘There will have to be a different approach this time round.  Government bond yields are very low. If they do begin a round of QE, the next form of easing from the Fed will involve buying more Treasury bonds and capping the yield on these Treasuries. The whole point of the first rounds of easing was to keep the bond yield low, and they were disappointed by the results.’

In the US the Federal Open Market Committee (FOMC), has already announced measures to keep its interest rates low until mid-2013, a move Greetham describes as ‘low-cost’ but which could already be a step in the right direction.