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28 June 2018, Sweden | Mutual Funds | News

Mark Twain and the future

When we summed up 2017, the verdict was that it was an unusually stable year, economically and market-wise. The first half of 2018 has brought more movement in the market and, in pace with less expansive monetary policy, the risks of a backlash in the world economy and the finance market are rising. For the market, the single-most important question is when will the next recession arrive.

Economic cycles have always existed and it is a safe bet this will also be the case in the future. Explanations of economic cycles are myriad and the truth is that every cycle is different. As writer – and market speculator - Mark Twain put it: "History doesn't repeat itself, but it often rhymes."

The starting position is different today, in the wake of the deepest recession since the Great Depression of the 1930s. In addition, monetary policy has never before been as expansive as in recent years. One consequence of pursuing overly expansive monetary policy, for a long time, is that debt ultimately becomes unsustainably high. Lower costs of financing encourage governments, companies and – especially – individuals to borrow for both investments and consumption. The likelihood of a financial crisis rises swiftly if returns on the investments and/or increases in disposable income are too low and borrowers cannot repay their debts.

It is worth remembering that history rhymes. Of the last 15 global recessions, 13 were preceded by austere monetary policy. Today, nine years after the last economic cycle bottomed out, only the US Federal Reserve has tightened its monetary policy. Even though most pundits believe this will change in the second half of 2018, we still believe a recession is several years away.

Key factors that could change our assessment are inflation, where slightly higher inflation is to be desired, but not so high that central banks are forced to institute tougher austerity measures and a recession becomes more likely. A full-scale trade war will reduce world trade, leaving a smaller pie to share. This will impact more export-dependent countries, and Sweden is one of the most export-dependent in the world. Even though we are many years into a recovery, the US is pursuing an expansive fiscal policy, which is cause for concern. Doubts about the capacity of the US government to repay its loans will have unimagined consequences for interest rates and exchange rates alike.

When assessing the financial market, it is only natural to focus on the risks and what can go wrong. Nevertheless, it is important to remember that the most likely outcome is that growth will continue, unemployment will fall and corporate profits will rise. Although there are a few dark clouds in the sky, our judgement is that the economic climate and the investment climate are a safe distance away from a cold and bitter winter. But then again, as Mark Twain is reputed to have said, "Climate is what we expect, weather is what we get."

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Thomas Elofsson

Head of Portfolio Management and Fund manager
Direct: +46 8 614 25 62

Risk information

Investments in fund units are associated with risk. Past performance is no guarantee of future returns. The money invested in a fund can increase and decrease in value and it is not certain that you will get back the full amount invested. No consideration is given to inflation. The Catella Balanserad, Catella Credit Opportunity and Catella Hedgefond funds are special funds under the Swedish Alternative Investment Fund Managers Act (SFS 2013:561) (AIFM). Catella Sverige Aktiv Hållbarhet and Catella Småbolagsfond may use derivatives, and the value of the funds may vary significantly over time. The value of Catella Sverige Hållbart Beta may vary significantly over time. Catella Avkastningsfond may use derivatives and may have a larger proportion of the fund invested in bonds and other debt instruments issued by individual national and local authorities and within the EEA than other investment funds, in accordance with Chapter 5, Article 8 of the Swedish Investment Funds Act (SFS 2004:46). Catella Nordic Long Short Equity and Catella Nordic Corporate Bond Flex may use derivatives and may have a greater proportion of the funds invested in bonds and other debt instruments issued by individual national and local authorities and within the EEA than other investment funds. For more details, complete prospectuses, key investor information, and annual and half-yearly reports, please refer to our website at catella.se/fonder or phone +46 8 614 25 00.

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