Italy, Brexit and China: Three key themes for the next 24 months – Insight CIO

Insight's1 Adrian Grey offers his thoughts on the trends to watch in the months ahead

Instability in the EU, China's accession to global bond indices and the inability of central banks to normalise rates: these are just three of the themes most likely to affect investors in the coming 24 months, according to Insight CIO Adrian Grey.

Speaking at the BNY Mellon Global Investment Conference in March, Grey noted how, even 10 years on from the Global Financial Crisis, central banks are still struggling to raise interest rates to a normal level. "In the US, notably, but also in Europe and in Japan, they've pivoted to a much softer stance," he said. "If a growth downturn, a softer dollar and lower interest rates are on the horizon that has implications for everything from fixed income in emerging markets to how you price credit risk."

Elsewhere, Grey highlighted the still-unresolved Italian debt problem and said discussions this autumn could be a potential hotspot. "We still view instability in Italy as a potential risk," he said. "It raises wider questions not only about the Italian state but also its banking sector and ultimately the future shape of the European Union."

Linked to this is the question of Brexit, he said, noting that the UK has traditionally operated as a fulcrum between the Hanseatic and Dirigiste tendencies in the Union. With that counterbalance gone, questions will be raised about the likely direction of the European project, he explained.

Turning to China, Grey noted how the emerging super power is the third biggest bond market in the world and yet is still predominantly owned by domestic investors. This is likely to change, however, with the inclusion of Chinese renminbi-denominated (RMB) government and policy bank securities in the Bloomberg Barclays Global Aggregate Index.2 Coupled with the addition of the RMB to the International Monetary Fund's Special Drawing Right (SDR) valuation basket in 2016, this opens to door to China becoming far more integrated in global financial markets than hitherto, he said.3

"There is an ongoing seismic shift in China," he added. "We're seeing a programme of economic liberalisation allied to the structural shift to a services-led economy. At the same time, efforts to deleverage are underway – as are efforts to tackle pollution. Whatever else you might want to say about the short-term outlook, what happens China over the next two years is here for the long term."

1 Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.

2 The inclusion of Chinese debt on the Barclays index in April 2018 came only a year after China A shares were added to the MSCI emerging market equity indices.

3 The SDR is an artificial currency used by the IMF, and is built from a basket of important national currencies. Countries can use SDRs as an alternative to more orthodox reserve currencies such as the US dollar or gold.

The value of investments can fall. Investors may not get back the amount invested.

Published as at 29 March 2019. INV01614. Exp: 29 June 2019.

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Mellon was formed on 31 January 2018, through the merger of The Boston Company and Standish into Mellon Capital. Effective 2 January 2019, the combined firm was renamed Mellon Investments Corporation.