Threadneedle Investments raises GDP forecast for developed world

Threadneedle Investments has raised its 2014 GDP forecast for developed economies as a result of the strengthening global economic recovery. Mark Burgess, CIO at Threadneedle Investments, comments.

The global economic recovery is gathering pace. It is driven by the developed world and as a result we have raised our economic growth forecasts for the three major economies. The US is increasingly becoming an attractive base for manufacturing, while housing and consumption remain strong. The UK housing market has also strengthened, with notable improvements outside the buoyant London. The unemployment rate has fallen materially and consumption shows increased confidence. In addition, we have increased our euro area forecast, reflecting healthy growth in Germany and a better than previously expected recovery in Spain and Ireland.

However, the better the developed economies seem to be doing, the more the discrepancy with the emerging markets becomes apparent. Volatility is likely to persist in the short term as emerging markets find increasing challenges to growth.

Tapering of quantitative easing is leading to capital outflows from the region, putting a strain on currencies, especially in those economies with weak balance of payments. Consequently, we are seeing a number of interest rate rises to defend currencies which, in turn, will hit economic activity. China’s economy is proving slow to reposition away from investment towards consumption. An extended banking sector and fears of cracks in the shadow banking system are additional worries.

It is important to note, however, that we do not expect these issues to become another contagious crisis. More emerging countries have floating currencies and higher currency reserves than in previous periods of crisis. The rapid currency devaluations and interest rate rises are already leading to the necessary adjustment of cutting consumption. China does not have a freely floating currency but it is not reliant on foreign capital and has some policy flexibility to help in managing its problems.

We therefore see the current emerging market weakness as a correction, after a strong rally, which could offer an opportunity to add to equity positions. We prefer exporters over domestic consumption stocks. Outside this, our portfolio themes are little changed, searching for strong, growing companies, payers of good and increasing dividends, M&A beneficiaries and companies well-positioned for the global economic recovery.

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