Paul Niven, head of Multi-Asset Investment at F&C Investments, discussing why he remains reasonably optimistic about the prospects for global growth in 2015 and provides his differing outlooks for the world’s two largest economies, the US and China.
The US: performing well, and strong enough to maintain momentum
“The US is currently performing well, with growth benefiting from rising consumption, higher capital expenditure by companies and a more buoyant housing market. With rapid employment growth possibly bringing with it higher wages too, investors are becoming increasingly confident that the recovery will soon reach a point where it is self-sustaining.
“The US stock market ended 2014 breaking through to new highs and earnings growth should be strong enough for that positive momentum to be maintained. In terms of relative performance, however, the US may lag because of lower earnings expectations for energy companies and a probable slight deterioration of survey data.
Expectation for Chinese GDP: around 7 per cent, with double-digit growth “over for good”
“We expect that GDP will grow by around 7 per cent in 2015 as the country continues rebalance away from investment and export sectors. It is noticeable, however, that the stock market has been moving ahead regardless. Having been a long-term underperformer, Chinese, shares have been doing very well on the back of monetary easing and a crackdown on the shadow economy. We are encouraged that the likes of China, India and Mexico are continuing to implement important structural reforms. Nevertheless, we retain our neutral stance.
Preference for equities over bonds
“We continue to prefer equities over bonds because of an ongoing improvement in growth globally, low inflation and another year of accommodative monetary policy from the world’s major central banks. Lower energy prices are also likely to delay any signs of rising inflation and prolong easy policy. Earnings growth should be the main driver of markets from here, underpinned by further share buybacks, merger and acquisition activity and dividend growth. While the decline in oil prices will hit energy earnings and capital expenditure, it will provide a fillip to consumption globally.
“Within markets, we are switching some of our US exposure into Europe as, despite the far stronger economic performance of the US, we expect investors to react positively to policy action by the European Central Bank and see scope for economic and corporate catch-up. The eurozone should also stand to benefit from a weaker euro, fiscal easing and improving banking prospects.”
Asset Allocation Summary
- We have moved our Global High Yield position from overweight to neutral, due to the market likely to remain sensitive to fluctuations in sentiment caused by the uncertain timing of interest rate hikes by the US Federal Reserve.
- We remain neutral on Emerging Market Equities as emerging markets face structural headwinds, but investors are returning and overall risk in investing in emerging markets is falling
- We maintain our underweight on Commodities as the strong dollar is negative for commodities and iron ore prices have tumbled on global growth concerns