LGIM sees better growth prospects than consensus for 2015
Legal & General Investment Management has predicted faster GDP growth next year than consensus figures currently suggest for China, the US, UK and the eurozone, according to the manager’s latest outlook for investors.
Its GDP growth forecasts for BRICs and Japan come in below consensus, but overall it sees the world growing faster than others expect.
Explaining the outlook, the manager pointed to key factors such as the sharp fall in the price of oil creating the conditions for benign monetary policy to continue even as employment gathers pace.
LGIM’s proprietary leading indicator that combines factors such as credit conditions, interest rates, energy prices and inventories, points to a sharp rise in growth next year to above 4% globally.
The oil price collapse is not seen as a precursor to weaker growth, because it is based on a supply glut rather than demand collapse, the manager said. Previous periods of growth, such as during the late 1990s and mid-1980s, suggest that commodity prices can fall while growth remains strong globally.
Meanwhile, economies will be stimulated by an improving level of labour participation, with more people in work. And while there is debate over the quality of the new jobs created since the financial crisis, the manager believes that next year could see a rapid transition from part time to more full time employment, further pushing up real wages against levels of inflation that generally will remain depressed. Wages in the US are predicted to continue rising sharply through 2016, further stimulating consumption.
Growth in the eurozone will remain weak, but LGIM also sees improvements in access to credit by both households and businesses. The chief concern is the risk of deflation occurring in the currency area, and the need for the ECB to provide further firm evidence that it will follow through on its announced plans regarding quantitative easing measures, including moves to build up its balance sheet.
However, LGIM believes that the ECB will be forced into buying sovereign bonds in order to hit its own QE targets, as there is insufficient depth in the corporate bonds market.
For investors in emerging markets, of key concern will be the impact of lower energy prices. Russia should be able to manage the lower oil price given the size of its foreign currency reserves, but in contrast it is a disaster for Venezuela, which is highly reliant on exports of oil. But oil importers such as India, Korea and Thailand will benefit from the lower oil price.
For fixed income investors the coming year could prove a turning point, LGIM suggested. Credit spreads compared to sovereign bonds are narrow, and while there might be the odd short term event that could squeeze core government bond yields down, the risk now is firmly on sovereign yields increasing as growth flows through the global economy.
There are not more cheap fixed income assets to purchase, compared to the situation as it was in early 2009, LGIM warned.