How global financial cycles can point the way for investors

SINGAPORE (April 19): While the majority of analysts focus on inflation and growth data to assess where global economies currently are in their business cycles, Capital Group Investment Management is providing an alternative method to determine the possible trajectories of asset prices instead: by paying attention to credit and house price developments.

Financial cycles, a concept and methodology developed by the Bank for International Settlements (BIS), track the combined evolution of house prices and the amount of private-sector debt in an economy, on the basis that the progress of each trend is influenced by the other in a positive feedback loop.

“It is important to emphasise that the financial cycle is credit-oriented and, therefore, quite distinct from the business cycle (which looks at output). This different focus has meant that, on average, financial cycles last at least twice as long as typical business cycles,” comments London-based currency analyst, Jens Søndergaard, in Capital Group’s April 2017 investment insights report.

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