Clipboard Icon

Has the Global Economy Reached "Peak" Peak?

In 2017, the global economy rode a wave of synchronous growth, low inflation and low volatility. But Investment Management Chief Global Strategist Ruchir Sharma says five trends could make 2018 a very different environment. 

2017 will likely be remembered as the year investors rode a wave of favorable trends: Global growth synchronized, inflation remained persistently low despite tightening labor markets and low volatility in both developed and emerging markets set a tone of unusual calm. 

While Sharma believes that we may have more months of euphoria ahead, his takeaway for investors is to be aware of the exit door in regard to illiquid investments.

But according to Ruchir Sharma, Head of Emerging Markets and Chief Global Strategist at Morgan Stanley Investment Management, these trends may be poised to turn.

“2018 could end up being a year marked by a confluence of peaks in many respects,” says Sharma. “Despite above-trend global economic momentum, there are some cyclical and structural signs that point to peak growth.  Record lows in global unemployment rates point toward peak employment.  The recent jolt of volatility may signal the end of peak calm. And all of this is coming at a time when liquidity is peaking across the world.”

Sharma’s top five trends for the year focus on these peaks and detail how each could shape markets and economies in 2018 and beyond.

Trend #1: Peak Growth

Sharma mentions that while current global economic growth is referred to in boom-like terms, the global economy is growing at a pace of merely 3.5 percent.1 While this is the fastest pace since the great financial crisis of 2008-2009, it is below the average of the postwar “miracle years,”2 he argues, and it may also be peak growth for three reasons: commodity prices, low global investment and weak population growth. 

“In terms of commodities, you have to look at countries like Brazil and Russia, which have gone from slumps of negative economic growth to now registering positive economic growth this year.  However, the question is, can commodity prices go higher from here?  So although we’re seeing a boost from commodity-producing economies, it could be limiting.”

A lack of global investment may also hamper further growth. “Investment levels in the U.S. and Europe are relatively low, largely because the world's manufacturing has shifted to China,” Sharma says. “So now China is heavily overinvested, and the Western world is underinvested.”  Sharma says we're likely to see a rebalancing in the coming months, with investment activity picking up in the Western world but slowing in China as the country moves toward a more consumption-oriented economy.

Finally, he points to a slowing in the population growth rate, which he calls “Peak People.”

Trend #2: Peak People

Sharma points out that from 1950 to 2005, there was an explosion in the working-age population growth rate, averaging roughly 2 percent a year.  But since 2005, the rate of growth has dropped to an average of 1 percent.3

“The two drivers of economic growth are increases in the labor force and increases in productivity,” says Sharma. “From 1950 to 2008, the postwar miracle period, the global economy experienced an unprecedented boom that coincided with an increase in the working-age population. Although the current economic conditions are considered boom-like, global economic growth today is nowhere close to what we experienced over that period. And it's likely, I think, to slip further because this trend has been going down, and it's a trend that’s very hard to reverse.” He points to a telling comparison between the mid-1980’s—where only two countries saw shrinking populations—versus today, where 38 countries have that distinction. 

As a silver living, Sharma says this trend has resulted in falling unemployment rates, which calms some fears about automation replacing workers in developed nations. “The unemployment rate today is close to a 40-year low,” Sharma says. “Even emerging markets are seeing about as low a level as we have seen since data was captured.”

Trend #3: Peak Positioning

Sharma also points out that investor optimism has driven cash levels worldwide to record low levels on both the institutional side and retail side. “My favorite new phrase is ‘Illiquidity is the new leverage.’ The size of financial markets has grown so big that the tail is now wagging the dog,” Sharma says. “In 1980, before the start of the great era of financialization, the value of global stocks and bonds was similar to that of global GDP. Now the global value of stocks and bonds is three and a half times larger than the global economy.4 This has major consequences in terms of economic activity.”

Sharma points out that if you examine the long-term trend from 1950 to today, the U.S. stock market is currently running about 25 percent above its long-term trend.5 His concern is that if markets correct for some reason and return to their long-term trend, it could be enough to tilt the U.S. economy into a recession.

“This is the magnitude of the wealth effect at play,” says Sharma. “The rising stock market may have contributed somewhere between a half and 1 percent of the GDP growth rate in 2017.6 And that is just in stocks. People are heavily invested.”

Trend #4: Peak Liquidity

Sharma mentions that we’re also at peak liquidity as central banks begin unwinding their balance sheets.  “Before the start of the financial crisis, the four major central bank balance sheets held about $4 trillion in assets. Now, it has exploded to nearly $18 trillion,”7 he notes. But he also points to the contraction that may be coming in the second half of this year.

“It’s been a very interesting experiment,” Sharma says. “The unwinding of this central bank experiment has already begun in the U.S. (Fed), but it has been countered because the European Central Bank (ECB), Bank of Japan (BOJ) and People’s Bank of China (PBOC) have been quite aggressive in their balance sheet expansions over the past couple of years. But by the end of the year all of the central banks will likely begin to see a contraction in their balance sheets.”

Trend #5: Peak Calm

Finally, Sharma sees signs that record-low levels of volatility may be coming to an end. “Until recently, the 12-month trailing volatility for global markets has been the lowest ever recorded.8 In the past year that’s been justified because economic growth volatility and inflation volatility have been so low.  But this trend is very much against the nature of markets,” he comments. 

“In any typical year9 the U.S. stock market has seen a 10 percent correction,” Sharma says. “Last year the maximum drawdown was barely 3 percent. And for emerging markets it's even more staggering.” He notes that even during the bull years of 2003 to 2007, emerging markets would typically see a 20 percent correction every year. Last year the largest drawdown was barely 5 percent.10

Sharma believes that as interest rates rise, so too will volatility.  “When interest rates rise, there's always some trouble. But there's usually a lag of about two years after an interest-rate tightening cycle begins,” he says. “Given the fact that the Fed began increasing interest rates at the end of 2015, by the middle of this year we should expect to see a rise in volatility based on this historical relationship.”

While Sharma believes that we may have more months of euphoria ahead, his takeaway for investors is to be aware of the exit door in regard to illiquid investments.  “Remember, illiquidity is the new leverage,” he says. “Think about how you might be positioned if the tide turns.”

Sharma also encourages investors to keep an eye on emerging markets: “Many emerging markets are still in the early stages of what appears to be an upturn after a long economic adjustment. There's barely an emerging market in the world today where the current account deficit is more than 3 percent of GDP,11 which is very different from what it was four years ago during the taper tantrum.”

He points to what he believes to be some breakout stars in Eastern Europe; long-term stories like Indonesia, the Philippines and India; and overlooked companies in emerging markets, which have the potential to benefit from early stages of the cycle such as financials and consumer cyclicals.


1 MSIM EM Research, JP Morgan Research, IMF, World Bank as of February 2018.

2 MSIM EM Research, IMF, World Bank, United Nations (Miracle years refers to the period from 1950-2008) as of February 2018.

3 MSIM EM Research, United Nation Population Database (Working Age Population refers to people between 15-64 years of age as per UN definition) as of February 2018.

4 MSIM EM Research, BIS, Mckinsey, WFE, IMF as of January 2018.

5 MSIM EM Research, Bloomberg as of January 2018.

6 MSIM EM Research, GS Research, JPM Research, IMF as of January 2018.

7 MSIM EM Research, Federal Reserve, European Central Bank, Bank of Japan, People’s Bank of China as of February 2018.

8 MSIM EM Research, MSCI AC World Index, as of January 2018 (based on data going back to 1988).

9 Based on data from January 2018 going back to 1988.

10 MSIM EM Research, using data going back to 1988 as of January 2018.

11 MSIM EM Research, Haver Analytics, IMF, as of February 2018.


There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. The risks of investing in emerging market countries are greater than the risks generally associated with investments in foreign developed countries. Stocks of small- and medium-capitalization companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. Illiquid securities may be more difficult to sell and value than public traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.


Volatility is a statistical measure of the dispersion of returns for a given security or market index. The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Gross Domestic Product (GDP) is a monetary measure of the market value of all final goods and services produced in a period (quarterly or yearly) of time. Nominal GDP estimates are commonly used to determine the economic performance of a whole country or region, and to make international comparisons. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto. Commodities are goods and services normally intended for sale on the market at a price that is designed to cover their cost of production. Liquidity: Characteristic of a security or commodity with enough units outstanding to allow large transactions without a substantial drop in price.


This communication is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

United Kingdom: Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA, authorised and regulated by the Financial Conduct Authority. Dubai: Morgan Stanley Investment Management Limited (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, 506501, United Arab Emirates. Telephone: +97 (0)14 709 7158). Germany: Morgan Stanley Investment Management Limited Niederlassung Deutschland Junghofstrasse 13-15 60311 Frankfurt Deutschland (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG). Italy: Morgan Stanley Investment Management Limited, Milan Branch (Sede Secondaria di Milano) is a branch of Morgan Stanley Investment Management Limited, a company registered in the UK, authorised and regulated by the Financial Conduct Authority (FCA), and whose registered office is at 25 Cabot Square, Canary Wharf, London, E14 4QA. Morgan Stanley Investment Management Limited Milan Branch (Sede Secondaria di Milano) with seat in Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy, is registered in Italy with company number and VAT number 08829360968. The Netherlands: Morgan Stanley Investment Management, Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. Telephone: 31 2-0462-1300. Morgan Stanley Investment Management is a branch office of Morgan Stanley Investment Management Limited. Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Switzerland: Morgan Stanley & Co. International plc, London, Zurich Branch Authorised and regulated by the Eidgenössische Finanzmarktaufsicht (“FINMA”). Registered with the Register of Commerce Zurich CHE-115.415.770. Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland, Telephone +41 (0) 44 588 1000. Facsimile Fax: +41(0) 44 588 1074.

U.S.: A separately managed account may not be suitable for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Please consider the investment objectives, risks, charges and expenses of the funds carefully before investing. The prospectuses contain this and other information about the funds. To obtain a prospectus please download one at or call 1-800-548-7786. Please read the prospectus carefully before investing.

Morgan Stanley Distribution, Inc. serves as the distributor for Morgan Stanley funds.


Hong Kong: This document has been issued by Morgan Stanley Asia Limited for use in Hong Kong and shall only be made available to “professional investors” as defined under the Securities and Futures Ordinance of Hong Kong (Cap 571). The contents of this document have not been reviewed nor approved by any regulatory authority including the Securities and Futures Commission in Hong Kong. Accordingly, save where an exemption is available under the relevant law, this document shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. Singapore: This document should not be considered to be the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor under section 304 of the Securities and Futures Act, Chapter 289 of Singapore (“SFA”); (ii) to a “relevant person” (which includes an accredited investor) pursuant to section 305 of the SFA, and such distribution is in accordance with the conditions specified in section 305 of the SFA; or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.   Australia: This publication is disseminated in Australia by Morgan Stanley Investment Management (Australia) Pty Limited ACN: 122040037, AFSL No. 314182, which accept responsibility for its contents. This publication, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act.


EMEA: This communication has been issued by Morgan Stanley Investment Management Limited (“MSIM”). Authorised and regulated by the Financial Conduct Authority. Registered in England No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Prior to investing, investors should carefully review the strategy’s / product’s relevant offering document. There are important differences in how the strategy is carried out in each of the investment vehicles.

A separately managed account may not be suitable for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing.

This material is a general communication, which is not impartial and has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

The views and opinions expressed are those of the investment team at the time of writing/of this presentation and are subject to change at any time due to market, economic, or other conditions, and may not necessarily come to pass. These comments are not representative of the opinions and views of the firm as a whole.

Charts and graphs provided herein are for illustrative purposes only.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific Morgan Stanley Investment Management product.

MSIM has not authorised financial intermediaries to use and to distribute this document, unless such use and distribution is made in accordance with applicable law and regulation. Additionally, financial intermediaries are required to satisfy themselves that the information in this document is suitable for any person to whom they provide this document in view of that person’s circumstances and purpose. MSIM shall not be liable for, and accepts no liability for, the use or misuse of this document by any such financial intermediary.

This document may be translated into other languages. Where such a translation is made this English version remains definitive. If there are any discrepancies between the English version and any version of this document in another language, the English version shall prevail.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without MSIM’s express written consent.

All information contained herein is proprietary and is protected under copyright law.

CRC 2039669 Exp. 02/28/2019

Clipboard Icon

Morgan Stanley Global Service Centers


Contact Us