Investment perspectives – Chris Mallin Macro Perspectives

The key chart

**Real growth in M1 (leading indicator), HH credit (coincident indicator) and NFC credit (lagging indicator) continue to move away from levels associated with recession risks in the Euro Area**
Source: ECB; Haver; CMMP analysis

The message from October’s data

Monetary indicators continue to move away from levels associated with recession risks in the Euro Area.

**Leading indicator: Growth in real M1 has rebounded and is at the highest level since October 2017**
Source: ECB; Haver; CMMP analysis

Narrow money (M1) grew 8.4% in nominal terms in October, up from 7.9% in September. In real terms, M1 grew 7.6% which is the fastest rate of real growth since October 2017 (8.0%) and compares with a real growth rate of only 4.7% in January this year. Given the leading indicator qualities of trends in real M1, this data supports the narrative that recession fears in the Euro Area have been overdone.

**Coincident indicator: Real growth in HH credit at its highest level since April 2008**
Source: ECB; Haver; CMMP analysis

Households and corporates are also increasing their borrowing at the fastest rates in the current cycle. HH credit (a co-incident indicator) grew 3.5% in nominal terms and 2.8% in real terms, the fastest rate of real growth since April 2008. NFC credit (a lagging indicator) grew at 3.8% in nominal terms and 3.1% in real terms. The real growth was marginally below the level of 3.2% recorded in August 2019, but again these rates are the highest real growth rates since June 2009.

**Lagging indicator: Real NFC growth at/close to its highest level since June 2009**
Source: ECB; Haver; CMMP analysis

Of course, credit growth remains relative subdued in relation to LT trends and concentrated geographically (HH in France, Germany, Benelux and Italy; NFC is France, Germany and Austria) and the demand for credit continues to lag the supply of money which indicates that the Euro Area has still to recover fully from the debt overhang (see graph below).

**Don’t get carried away – the demand for credit from the private sector (PSC) still lags the supply of money. The Euro Area continues to suffer from a deficiency in the demand for credit.**
Source: ECB; Haver; CMMP analysis

A simple conclusion

Nonetheless, the message from October is simple: current monetary trends remain inconsistent with recession fears in the Euro Area

Please note that the summary comments above are abstracts from more detailed analysis that is available separately

As an investor, I combine three different time perspectives into a single investment thesis or strategy

Long-term (LT) investment perspective

My LT investment perspective focuses on analysing key structural drivers that extend across multiple business cycles.

As a macro and monetary economist, I start by analysing the level, growth, affordability and structure of debt. In my experience, this is the most important feature of LT secular cycles with direct implications for: economic growth; the supply and demand for credit; money, credit and business cycles; policy options; investment risks and asset allocation.

My LT investment perspective reflects my early career in Asia and my experience of Japan’s balance sheet recession.

Medium-term (MT) investment perspective

My MT investment perspective centres on: analysing money, credit and business cycles; the impact of bank behaviour on the wider economy; and the impact of macro and monetary dynamics on bank sector profitability.

Growth rates in narrow money (M1) and private sector credit demonstrate robust relationships with the business cycle through time. My interest is in how these relationships can assist investment timing and asset allocation.

My investment experience in Europe shapes my MT investment perspective, supported by detailed analysis provided by the European Central Bank (ECB).

Short-term (ST) investment perspective

Finally, my ST investment perspective focuses on trends in the key macro building blocks that affect industry value drivers, company earnings and profitability at different stages within specific cycles.

My ST investment perspective is influenced by my experience of running proprietary equity investments within a fixed-income environment at JP Morgan. This led me to reappraise the impact of different drivers of equity market returns.

One strategy

My investment outlook at any point in time reflects the dynamic between these three different time perspectives.

My conviction reflects the extent to which they are aligned.

Tag: Investment perspectives

“Fading recession risks?”