GFC has created great economic divides

Major economies once shared strong correlations, underpinned by stable growth and low inflation. But since the global financial crisis (GFC), different countries are going down very different paths, making it more difficult than ever for fund managers, according to a report by Standard Life Investments.

Standard Life Investments’ Global Spotlight report has found that two key factors have contributed to this divergence in economies following the GFC.

The first is the various states of disrepair economies were left in following the GFC. The US economy showed all the classic signs of a large output gap, while UK signs were less clear. The Eurozone was harder to pick due to its diversity, with core economies like Germany performing very well, while the periphery is still mired in crisis.

The report found the second major contributor to this divergence was that much of what was driving inflation in major economies was now generated externally, such as rising food and oil prices.

It said these influences were harder for domestic economies to control than internal factors, as it was difficult for central banks to respond to external price jumps.

To take advantage of the current diverse environment, the report suggested investors should consider the global inflation backdrop and the rather different policy responses between countries.

One avenue, it said, was to pick and choose between inflation-linked bonds issued by different countries to exploit moves in relative inflation and interest rate expectations.