Saxo PB’s Ties Knuthsen sees continued global economic expansion

Teis Knuthsen, CIO at Saxo Private Bank, points to signs that the global economy will continue to expand through 2014.

The Paris-based Organisation for Economic Development and Co-operation (OECD) has published its composite leading indicator (CLI) for the month of December. For the 15th consecutive month the indicator pointed to higher growth rates for the global economy, and for the 10th consecutive month it has positioned us in an economic expansion according to our business cycle model.

As in the previous months, an improved economic climate is driven by large advanced economies, particularly the US, Japan and, increasingly, the euro area. In contrast, key emerging markets such as Brazil, India and South Africa continue to lag. The growth signal from China is flat, pointing to growth below trend in the coming months.

In general, the OECD leading indicator points to higher global economic growth in 2014. This will particularly be the case if business investments begin to pick up in earnest, after being dormant for several years. Higher investments may lead to stronger labour markets and in turn higher consumption rates and a more sustainable upswing. If investments fail to rise, a slowdown may emerge during the year.

Expansion continues to support risky assets

Historically, there is a close relationship between the business cycle and financial markets: Generally, markets reward risk, but not when the economy is in decline. This simple insight helps us calibrate our tactical asset allocation stance.

Supported by the rise in the CLI, we have been looking for positive returns on risky assets since the end of 2012. Further, our macro model remains consistent with a continued outperformance of stocks relative to bonds.

In general, we continue to recommend an overweight of equities vs. bonds. The combination of an unusually accommodative monetary policy, directly aiming to lift asset prices, and a rise in activity levels has resulted in significant price gains on global equity markets during the past year, but as long as the economic cycle is improving, stock market corrections should be expected to be modest and short-lived.


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