064 | Where now for policy makers?

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  • David Page, AXA Investment Managers

Learning outcomes:

  1. Why China's exchange rate policy is causing concerns among global investors
  2. The inflation dilemmas facing the federal reserve and the Bank of England
  3. How the uncertainties caused by the UK referendum on EU membership will affect UK GDP growth and asset prices in 2016


Learning outcomes: 1.Why China's exchange rate policy is causing concerns among global investors 2. The inflation dilemmas facing the Federal Reserve and the Bank of England 3. How the uncertainties caused by the UK referendum on EU membership will affect UK GDP growth and asset prices in 2016 Tutor: David Page, Senior Economist, AXA Investment Managers ROBERT BAILEY: Hello and welcome to today’s AXA Investment Managers webcast. I’m Rob Bailey. I’m Head of UK Wholesale Distribution, and today I’m joined by David Page, Senior Economist with AXA Investment Managers. David’s got specific responsibility for the UK and US but has a very global remit, as all economists do. So David’s as I say a senior economist within our global research team headed up by Eric Chaney, as you can see a large number of thought leaders and inputs to help us formulate our economic views at AXA Investment Managers, and today we’re going to cover off a number of areas. There’s not much going on in the economic world right now, David, but some of the key points looking at US monetary policy, looking at the impact of China, some of the things that we’ve seen going on there earlier on this year, and of course the oil price which continues to fall. And I know that one of your key themes this year is Brexit, so we’ll come to that at the end. But probably the driver for a lot of thinking for a lot of people is monetary policy. Set us a scene for where you think that is right now, and where you see the next activity and that over the coming months. DAVID PAGE: Well, clearly, as we ended last year, we were at the start of a divergent path. So we’d seen the Federal Reserve (Fed) make the first increase that we’d seen in monetary policy since 2006. At a time when we were seeing other central banks actually ease policy, and that caused something of consternation in markets. We’ve been used to, since the financial crisis, seeing effectively monetary policy moving lockstep across the globe. Now what we’re seeing is something that actually is historically more normal: economies moving slightly out of phase with each other and therefore requiring slightly different timings in terms of monetary policy response. And the Federal Reserve is the first to see some reaction come through there. I guess as we go into early 2016 the view has to adapt to further turmoil that we’ve seen so far. We’ve seen a significant fall in Chinese stocks; we’ve seen some contagion in the early parts of 2016 affecting other markets; and we’re also, as you suggest, looking at oil prices reaching new lows over that period, which has an impact on the inflationary outlook. So the question really is how the Federal Reserve is going to deal with that. Are we going to continue to see this smooth almost quarter per quarter path that the Federal Reserve was projecting back in December? Or do we see some accommodation for that? And to our minds I think it’s likely that the Federal Reserve is likely to accommodate for the weakness that’s coming through in the economy at the moment. Even when we forecast a December hike back in August last year, we thought there would be a significant pause between the first and the second, and I think it’s more likely that the Federal Reserve chooses a bit more time to introduce the second hike, and we’re looking for that to come in June. ROBERT BAILEY: So, the divergence with Europe, the divergence actually with the rest of the world, I think the US is one of the few economies where we’re seeing any form of interest rates, has clearly had an impact on the US dollar and the expectation there. How do you see that playing out? DAVID PAGE: Well I think the divergence should cause two different effects from financial markets, but clearly the one that most people have focused on to start with is the dollar. And we’ve seen appreciation of the dollar in anticipation of Federal Reserve reaction across all of 2015: US trade-weighted dollar was up in excess of 15% last year. Since the Fed has tightened policy in mid-December we’ve actually seen a further 2% appreciation of the dollar already in trade-weighted terms, and it looks like it’s going to be moving a little bit further across. Now we’ve focused a little bit on the bilateral currencies. You know, recently the Chinese yuan’s depreciation has been in the news; the euro has softened a little bit; sterling’s come under pressure to the dollar. But actually when you pull it all together, the moves have been pretty consistent. So all three of those currencies, the yuan, the euro and sterling, have all fallen by about 4 or 5% against the dollar over the last three months. So what you’re seeing is dollar strength continuing, and I think that’s likely to come through this coming year in 2016. Now how much more is going to have a big bearing on what the Federal Reserve does. To our minds, we think we’ll see a more modest rise in the dollar across the course of this year than last year, and that should allow the Federal Reserve some further tightening to come through. But clearly, if you see another huge increase in the dollar, like we saw in 2015, then that could really reshape the way the outlook is for the economy. ROBERT BAILEY: And really thinking about the mentality and the psychology of the Fed, they’ve got a domestic-based agenda when they’re making their decisions, do they really worry too much about the strength of the dollar? DAVID PAGE: Yes, insofar as it impacts their primary goals. So their primary goals are employment and inflation. Now, arguably, perhaps the strength of the dollar has a relatively vague impact on the employment backdrop, but it has a very direct impact on inflation, and of course it’s inflation where there’s the most concern on the Federal Reserve at the moment. The minutes of the December meeting showed that there are quite a few FOMC members themselves that are not exactly convinced we’re going to see a strong inflationary impetus over the next couple of years. And the more the dollar appreciates, the less of an impact there’s likely to be in terms of inflation. So I think if we see the dollar continue this strong path of appreciation that we’ve seen over the first few weeks of the year so far, that’s really going to give the doves in the FOMC a little bit more ammunition to say ‘well shall we just hold off a little bit here guys and wait to see some signs of inflation emerging before we continue pursuing further rate hikes’. ROBERT BAILEY: So it becomes more a case of actually an evidence-based decision rather than an expectation that with employment rates at very high levels that that triggers inflation in the future. DAVID PAGE: Well, it’s not going to be that easy for them, I don’t think, because both camps in the Fed believe that there’s not going to be that much evidence of inflation over the next few quarters. The difference is that there are those in the Fed that believe that actually inflation is not going to emerge in any big way over the next few years, and those that think it will emerge over the next few years. So actually I think the next couple of quarters is still going to be a pretty, if you like, faith-based policy: a policy based on expectation of the emergence of inflation rather than one that they can actually point to and say this is signs that it’s coming through. Now clearly they’ll be looking at some of the forward looking indicators, and wage growth would continue to be something that the Fed would love to see emerge from the US economy, but as yet that’s proving elusive as well. ROBERT BAILEY: So, if we then take that into a broader context, you’ve got a slide here which is talking about the support for European and Japanese equities, and we’ve seen some pretty dramatic activity in equity markets during the early part of this year. What does this relate to then, this supportive element, explain how that all blends together? DAVID PAGE: So I think what we’re looking at to some extent is from the divergence of monetary policy is actually the convergence of growth prospects. So you have what will be a headwind to US economic activity in the form of the dollar, but the softness that we see come through in terms of the euro, the softness that we see come through in terms of the yen, should be something that proves supportive for underlying economic activity there. At the same time the Bank of Japan and the ECB are at the very least likely to maintain easing monetary policy, and we think it’s likely that the ECB if anything adds to further stimulus. So you have a background where domestic growth is probably going to be well supported, both by policy and by currency and by lower commodity prices, and that provides a good backdrop for equities. But in those economies like Japan, like the eurozone, where we’re seeing the currency falling, clearly you also get a translation effect come through, where we would expect the softer currencies to bolster corporate earnings, and that as well provides a decent backdrop. So we think that the outlook for those equity markets where you’re actually seeing softer currencies come through should be relatively supportive as we go beyond this global contagion period that we’ve been in at the start of the year. ROBERT BAILEY: And actually one of the questions we’ve had so far has been around the way that the equity markets have reacted to the slowdown or the perceived slowdown in China and so forth. How does that impact your longer-term view around the support that these markets have? DAVID PAGE: Well it’s something that obviously we’re monitoring it as it occurs. But I think what we’ve seen so far, and the interesting thing from a developed markets perspective is that the contagion that we’ve seen so far has not been a contagion of Chinese equity markets falling and therefore global equity markets falling, actually it’s been much more specific, and looks much more concentrated on changes in the Chinese exchange rate policy. And I think the concern is not so much that you’re just seeing a slowdown come through in China, I think that by and large is what most in markets accept is going to happen. Our own macro forecast for China is that although we saw just below 7% growth in 2015, we’ll see growth a little bit softer still in 2016, and we’re looking at 6.3%. So there is an expectation that this slowdown is coming through. I think the concern is that we see something a little bit worse than a macroeconomic slowdown. And that’s prompted by the movements that are coming through in the exchange rate, some uncertainty of how the authorities will handle those movements, and at the same time the concern that the fall in currency that’s coming through from China could prompt capital outflows on the scale that we saw back in August/September last year when we first started changing the exchange rate regime in China. So I think the concerns for financial markets at the moment are that we have an unwieldy outflow of capital from China, and that a genuine concern about how the global economy might react to that. So clearly that’s going to be one of the things that shapes our view across the course of the year, but we’ve not quite bought into the full pessimism of that view, and we are looking at fundamentals that otherwise are somewhat more supportive of equity markets. ROBERT BAILEY: So, understanding that capital flight coming out of China, out of the yuan, where do you see that going? Is it all going to US dollar assets or is that more broadly based? DAVID PAGE: I think it’ll be more broadly based, but obviously the Chinese economy has for a long time had quite an association with the dollar. And if we think about the Chinese authorities, 60% of the reserves that they hold are dollar-based reserves. Now we’re obviously seeing the authorities run down that reserve base a little bit, but it looks like the private sector in China is buying US dollar-based assets even as the authorities are letting the situation run or the positions run a little bit lower. So at the moment it looks like most of the transactions are still against the dollar, but I would think there would be a more broad reaction. ROBERT BAILEY: So let’s drill down a little bit more into China. You’ve got a slide here which talks about China walking a maturing path and it always strikes me that when you talk about growth within China, you’ve always got to remember that the denominator in that fraction has grown so significantly over the last 20 years that actually naturally you’d expect some kind of slowing of growth, would you not? DAVID PAGE: Exactly, and I think the other thing to bear in mind is we’re still talking about an economy that’s going to be growing we think by 6.3% in a year which is still a huge expansion when you compare it to any other economy. But it is slower than the 10% growth rate that we saw averaged over 2000 to 2010. And I think we choose the term ‘maturing economy’ for two reasons. One is the fact that one would expect an economy that’s grown like China has to see some softening come through. And the Chinese authorities are purposely trying to steer the economy away from some of the older areas of the economy, the mercantilist-led industrial policy towards the service sectors, and trying to increase some value add to the Chinese economy through that. The problem with that sort of adjustment is that service sector growth tends to come with slightly softer productivity growth than you’d see in the industrial sector, and that’s why you tend to get this natural slowing in the growth rate. But the other factor that’s impacting China is literally the ageing of the workforce and hence the maturing reference. So we’re now seeing because of the impact of the one child policy, we’ve seen a very quick run up in the labour supply, but now we’re seeing the dependency ratios start to move the other way, and consequently we’re seeing a labour supply which looks like it’s going to be only broadly flat for the next couple of years, and then will probably gently decline. So it’s very difficult for the economy to maintain the growth rates that it’s seen previously when you’ve actually switched from an economy that’s seeing a growing labour supply to one that’s actually contracting. And so that also has some impact on the outlook. ROBERT BAILEY: So talk us through this slide then, because we talk about the maturation process. This is trend growth and production components, what does it actually mean? DAVID PAGE: So what we’re seeing here is that the blue line here reflects the slowdown that we’re seeing come through in the labour force, and we think that’s going to continue. The total factor productivity and skill components together try and combine some views of productivity, and this sort of slowdown that we’re seeing come through there is what we think is the start of the combination of the switch from industrial to the service sector. And the other key transition that China’s going to try and make is to rely more, as developed economies do, on consumption-based growth rather than in investment-led growth. But we can see from the red portion of the chart here how much capital growth has impacted or has been a feature of the trend increases that we’ve seen coming through in China over recent years. So, to see that component start to slow as well is also going to be something that reduces the trend growth rate. So the trend growth rate is giving you an idea of how much the Chinese economy can grow by. Now of course on any given year you could theoretically see demand grow much more quickly than that. You could see a headline growth rate that was back towards the 10%. But the point is if actual GDP is so much more than a slowing GDP then you start to use up spare capacity, you start to run out of resource, and that’s when you start to generate inflation pressure. Now clearly that sort of talk against the environment that we’ve seen in the early few weeks of 2016 is pretty far-fetched, but it’s this slowdown in the trend growth rate of the economy which we think is also leading to a slowdown in GDP itself. ROBERT BAILEY: And looking at it, so can you just explain to me, the green portion of that relates to you’ve put skill, what does that really mean? DAVID PAGE: Well that’s more specifically referring to labour productivity growth within that, as opposed to more economic and technical total factor productivity. But it’s easier to think of the two together as some sort of more generic portion of productivity per se. ROBERT BAILEY: Let’s move on and just have a look at GDP pace here. This is the UK. So talking through what you expect to see happening in the UK in terms of GDP growth, clearly that’s going to be impacted by things like the oil price, dollar strength and so forth, how do you see this playing out? DAVID PAGE: Well we still think that the UK is relatively well supported for decent growth going further forwards, and that’s partially because you’re seeing strong employment growth coming through. The weak oil prices and the weak commodity backdrop in general is meaning that inflation is still close to zero, and is likely to remain very low for the next few quarters as well. So even though wage growth has been subdued by historic standards, although it is picking up a little bit now, real wage growth is still pretty strong. So you’ve got strong employment, decent real wage growth, and that provides a good backdrop for household spending which is the lion’s share of UK GDP. So that provides a decent backbone for growth as we look to 2016 and indeed into 2017. Around that there are always going to be some funnies. If we think about Q4 for example we’ve seen, Q4 2015 was very mild. So for example utility production was down a lot. It may well be that Q4 GDP is a little bit softer than we’ve seen in recent quarters. More specifically I think as we look ahead into 2016, one of the other things that we’re slightly concerned about is the impact that the Brexit referendum will have. Now, to put our cards on the table, although the polls are very close at the moment, our central assumption is that the UK will ultimately vote to stay in the EU. So although we consider the possibility of an exit and the large impact that could have, when we look at our central forecast, what we’re really considering is the uncertainty that the referendum itself causes, and that in itself could be a bit of a headwind for growth. Domestic business might be a little unsure of what’s going to happen a little way down the line, and so it might think to itself well why invest now in the first half of the year, why not wait until after the referendum and then see if we want to invest. And I think if that story’s the case for domestic investment then it’s doubly so for foreign direct investment. Arguably a lot of investment into the UK is done so from the financial services perspective and Brexit asks a lot of questions about how financial services would behave outside of the EU. So again there’s an argument that foreign companies that are looking to invest in the UK might just sit back for a little while. And that lack of investment through 2016 we think is going to see a gentle softening in the growth rate. So we’re looking at growth this year at about 2.1% which will be somewhat slower than the 2.4%, we think, we’ve seen in 2015. ROBERT BAILEY: And one of the elements of GDP growth, not just in the UK but more broadly, is capacity and you talk here about capacity being eliminated. How do you see that working through the system? DAVID PAGE: Well the chart we have here is about unemployment, so we’re looking specifically there at capacity and the labour market. And the point we make is that when you see the growth rate that we’ve seen in the UK over the last three years now really, it’s been sufficient to start to absorb the spare capacity, so it’s been sufficient to bring down unemployment. And actually the fall in unemployment in the UK has been very similar to the fall in the US. So it’s the fall in spare capacity in the US that has led the Federal Reserve to tighten monetary policy and it’s the fall in capacity in the UK that ultimately will lead the Bank of England to tighten monetary policy probably across the course of 2016 as well. The specific impact is likely to emerge from unit labour costs. We would expect to see wages accelerate gently across the course of this year. We’re also in the UK still seeing this unusual pattern of very subdued productivity, and the combination of gently rising wage growth but still subdued productivity is going to see unit labour costs rise, and that tends to be what drives the central banks’ concern about medium-term inflation. Now of course the specific level of sterling or the specific rate of commodity prices is something that’s going to impact that short-term outlook, but the medium term is driven by where the central bank believes that labour costs are going, and they look like they’ll be gently rising across 2016. ROBERT BAILEY: So, with regard to inflation, which I guess is the key driver for when we’re likely to see interest rate rises in the UK, talk us through your expectations on that front. DAVID PAGE: Well I think the Bank of England has a particularly difficult job here. I mean the short term is relatively straightforward, particularly with oil prices at these lows. The short term suggests that the headline rate of inflation is going to be subdued, certainly below the 1% level at which the Bank of England has to write to the Chancellor of the Exchequer and explain why they’ve missed their target by so much, for a number of quarters. And it’s going to be very difficult I think for the Bank of England to tighten monetary policy with headline inflation below 1%. So that arguably would hold the Bank of England’s policy steady until perhaps the second half of this year. But on the other hand in November the Bank of England was concerned that moving it beyond the next few quarters and the low levels of commodity prices, as we look to the two, three-year area where they believe monetary policy is most effective, in November they were forecasting the biggest overshoot of their inflation target that they had done in a decade. Now since that time we’ve seen sterling, as we talked earlier about, falling by about 5% against the dollar; it’s also eased back against the euro. So that’s only going to push the inflation outlook slightly higher further ahead. So the bank’s caught in between this bind where the very short-term outlook is for low inflation. They’re concerned that medium-term inflation is building and actually may be building faster than they previously thought. Now we think that if you continue to see oil prices at these levels and inflation in the short term does remain low, then the bank will want to wait until you get back to about 1%, and that could push a bank rate decision back into the second half of this year. But they’re not going to want to move it back much further than that, because of their medium-term fears. And so where the market’s now pricing rate hikes well into 2017, I think it’s much more likely that we’ll see the Bank of England following the Federal Reserve this year, and certainly probably around the middle of this year. ROBERT BAILEY: So, looking at this chart here, our forecast of expectation of inflation is one where we’re seeing pretty much in line I guess with the core perspective. What are the threats to that inflation? And obviously oil, which has been a huge base effect on inflation, what are the other key threats you see to the inflation rate? DAVID PAGE: Well, one of the things that we’re worried about – I guess there are a number of factors. Sterling and what we see come through from sterling could be important. So for example if you had a scenario where the uncertainty of Brexit was something that also added to the weakness of sterling, then that would import further inflation further down the line. But I think one of the things that the Bank of England’s concerned about is inflation expectations. So actually over the last, well since the financial crisis, UK and most global inflation expectations have been relatively well anchored around the sort of inflation targets of the given countries. And that’s given central banks quite an enormous scope of leeway to move monetary policy and to look through very short- term deviations. What the Bank of England will be concerned about is the fact that we’ve seen low inflation for quite some time and the expectation is that that could continue. And if agents in the economy begin to believe that inflation is never going to rise back to 2%, that the Bank of England isn’t even trying to get it back to 2%, then they can take actions that almost guarantee that outcome. So if we think about wage demands or the wage-setting process, it may well be that workers are happier to accept 1% wages, because they really don’t expect to see that much in terms of inflation anyway. But that then builds in a consistently lower message. And that sort of slip in inflation expectations is how you move from a period of stagnation, a period of weak inflation, to something that’s more persistently like deflation. We’re not there yet, but that’s clearly going to be something that’s in the back of the Bank of England’s mind and indeed in all central bankers’ minds as they work out the path of monetary policy from here. ROBERT BAILEY: Now, we’ve mentioned Brexit a few times, and I think talking about the UK’s position with the EU, I know that you’re working on a number of papers which will be released during the course of the year, and to get those papers quickly and easily actually people can download the AXA IM app which is available in the App Store. Talk us through your central scenario of this process over the next 12 months or so. DAVID PAGE: Well I think the central scenario, and there’s still a lot of uncertainty because the government has still not given a referendum date, it’s still not in theory made up its own mind on what it wants to do with the UK, how it would campaign in such a referendum, but our central scenario runs pretty much to the following. That the government has submitted the negotiation to the EU that it wants to change how the UK runs within the EU, and that decision and that whole process is something that’s due to come to a conclusion at the EU summit in February. After that David Cameron should be in a position to decide whether what he’s achieved in this renegotiation process is sufficient to convince him of the merits of staying in the EU or not. So he should be able to take a position one way or another. And once he’s decided that position he should be able to announce a referendum. Now, there’s much media speculation at the moment that the referendum will take place earlier on in the summer, perhaps June or July. That seems a relatively short timetable to us, and we see it equally likely that it occurs after the summer, September/October. But by and large it looks like the referendum’s happening this year rather than before the end of 2017 which is actually all the Prime Minister has actually committed to. So in that sense all of the uncertainty of the referendum would take place in this year. Now the polls have over the last couple of years improved in the sense that there’s been a net boost or a net positive for those that want to stay in the EU. And that was the case up until the fourth quarter of last year. But in the final months of 2015 we saw a distinct narrowing such that many polls are suggesting it’s pretty neck and neck now. Now it’s not clear why we’ve seen that narrowing, why the net positive has eroded, but I think a couple of candidates might be that many had listened to what the Government was saying about the renegotiation and the fundamental change to the UK’s role, and perhaps been disappointed by what the Government’s actually ended up asking for from the EU. But of course the other big factor in many people’s mind with the EU is migration, and the broader EU migration story, the refugee crisis that we’re seeing, some of the movements in people from Syria and other parts of the world and EU in general may be something that people conflate with this referendum as well, and it might add to the fears they have of migration. And so that might be one of the reasons that we’ve seen a narrowing too. And that of course remains a risk as we go through 2016; it’s hard to call exactly where that’s going to go. But our view is that there has been a net positive. When you look at referenda over the last 30 years, there tends to be a little bit of a bias to the status quo, and that bias tends to come out in the final months of that. And we also expect to see more support for staying in once, and we think it will be the case, the Government chooses to back staying in, or at least the Prime Minister does, and indeed we expect British business to make the case for staying in a bit more vociferously as well. So all of those factors lead us to the view that we do think we’ll stay in, but I think it’s something we’re going to be actively debating for the next six to nine months. ROBERT BAILEY: And probably beyond as well. Let’s just quickly have a look at the impact. Were the UK to vote to leave the EU, what do you think the key changes would be? DAVID PAGE: I think that’s almost the point with the EU that if we choose to leave there are whole host of issues that it opens up. We talked about migration and migration is one of those. The UK has a large number of foreign workers that are embedded in the system and that provide a great deal of value to the UK economy. A lot of those, about 40% of those, are EU workers. So it would be unusual for those EU workers to lose their rights to work in the UK and similarly there’s a lot of UK workers that work in the EU. So that whole, not just the future scope of migration flows but the stock of migration as it stands at the moment, is a big issue. The other two concerns I think for the UK will be the trade relationship that we have. If we were to leave the EU there would be a period, approximately a two-year period of negotiating with the EU about what relationship we would have in terms of trade access. So the short answer is we don’t know what would happen there. But we suspect that you would end up with a situation where the UK had pretty good access in terms of goods exports, much as anything because we import a lot of goods from the EU, but our access to EU markets for services might be restricted and that could have quite an impact. But it’s not just the EU. Through the EU we have trade relationships with Canada, with South Korea, with Switzerland, so the UK would lose those, and we’re also negotiating relationships with the US and Japan. Now part of the exit camp is about the fact that we could renegotiate different roles and different trade relationships, and of course we could over time, but it would take time, and some countries particularly the US have questioned whether they would see it as a priority to negotiate those trade relations with a smaller economy like the UK. So that’s going to be important for the UK which is a very strong trading nation. I guess there’s much listed here, but I guess the other point to make is that financial services I think would be an area that could be particularly impacted. Many have said that we would gain a lot of freedom from being able to have regulations that we made up rather than that were written in Europe. But actually I think to maintain access to European financial markets we would probably have to adopt some form of regulatory equivalence anyway. So we wouldn’t get that much leeway. And even then I think access is likely to be less beneficial to us than it currently is within the EU and within the trade relationship that we currently have. So given that the financial services account for over 8% of the UK economy, that would be a significant hit to the UK if we saw a meaningful disruption to that industry as well. ROBERT BAILEY: And how would you expect markets to react in a scenario where, I mean you’ve even got domestic political implications with the Scottish independence being revisited and everything that comes with that, how would you see markets in that kind of uncertainty? DAVID PAGE: Well I think different markets will react differently. I think one of the markets that will be hit the most is sterling, and sterling tends to reflect the degree of confidence in the economy. But of course if you think about the UK’s backdrop at the moment, it imports a lot of capital. So because we have a current account deficit we achieve that by borrowing from overseas. And anything that affects overseas lenders’ confidence in lending to the UK could have an impact in sterling markets. So we would expect to see a significant decline come through in sterling, even from here. Of course the impact that an exit would have on the economy would also prompt different reactions from the authorities, and we expect the Bank of England would try and cushion some of the negative impact of growth, probably by cutting rates rather than tightening policy over the next couple of years, and certainly signalling that rates were going to remain weak for some time. And that might mean that overall the effect on bond markets was pretty neutral. Bond markets would have to cater with the outlook for monetary policy being easier, but at the same time some concerns and perhaps even some capital flight. We certainly saw some concerns when we ran into the Scottish referendum, although it’s slightly different this time because with the Scotland referendum we were actually talking about the separation of the sovereign, and that’s not the case now. And equity markets I think different sectors will perform very differently. Some would undoubtedly benefit and certainly benefit from a lower level of sterling. But I think if you think of financial services, if you think of exports in general, the uncertainty and the likely impact of exit would have a negative net impact on equities over that period. ROBERT BAILEY: Let’s draw this to a conclusion, and we’ve maybe answered a couple of the questions we’ve had here about markets and so forth. But in terms of your summary do you want to give us just a summary of you see the economic backdrop, and perhaps just an indication of how that plays through financial markets. DAVID PAGE: Yes, I think we’ve started 2016 in a very pessimistic tone, a tone that’s full of fear and a great deal of uncertainty, and I think that tone should give way to what’s likely to be a more supportive growth backdrop. We do expect growth to emerge. We do expect it to continue in the US, in the eurozone, in the UK and over a period of time those sort of solid, if unexciting fundamentals, should provide something of solace for many markets. It’s therefore likely to end up continuing to be one of divergent monetary policy and that creates some of its own concerns and issues as well, so we do see it as a period where the dollar is likely to appreciate. We do think that sterling ultimately will appreciate. I think the second half of this year, potentially post Brexit, post-Bank of England hike could see sterling doing reasonably well, but again different movements in different currency areas. For bond markets, in general, I think what you’re likely to see is only a very modest rise in yields come through. Now that doesn’t suggest or that shouldn’t be read to say that we see a gradual movement. I think, as we’ve seen in the first few weeks of this year, markets are going to be very prone to volatility across the course of this year with all the uncertainty, and I think bond markets will be no exception. But I think if we look to where bond yields might end up in the year, even though there could be some violent moves, we would expect to see only a gradual increase which reflects central banks’ ambitions for only gradual tightening coming through in monetary policy, and to some extent the still depressed nature of global economic activity weighing on those markets as well. ROBERT BAILEY: Very good. Thank you very much, David Page, Senior Economist at AXA Investment Managers. And thank you for joining us. I would encourage you to download the app, the AXA IM Insight app through your device if you want to follow more of David’s thoughts, particularly on Brexit which will be a continuing feature throughout the year. But for now thank you very much for joining us. This communication is for for investment professionals only and must not be relied upon by retail clients. Circulation must be restricted accordingly. Any reproduction of this information, in whole or in part, is prohibited. This communication does not constitute an offer to buy or sell any AXA Investment Managers group of companies’ (‘the Group’) product or service and should not be regarded as a solicitation, invitation or recommendation to enter into any investment transaction or any other form of planning. It is provided to you for information purposes only. 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