FYI | Apr 23 2014
– Global growth to improve in 2014
– Corporate earnings to rise
– Equity values to rise
– Selection now important
By Greg Peel
Credit Suisse economists forecast global economic growth of 3.3% in 2014 assisted by generally accommodative monetary policy. The Bank of England is expected to be the first major central bank to raise its cash rate, in the March quarter 2015, while the US Federal Reserve will follow in the December quarter 2015, the broker assumes.
Credit Suisse’s global equity strategists remain bullish, seeing the US broad market S&P 500 at 1960 by year-end, and being most bullish on continental European markets. Asian markets should also see double-digit percentage gains from their low PE bases despite the headwind of slowing Chinese growth.
Citi economists expect global growth of 3.1% in 2014 and 3.4% in 2015, up from 2.5% in 2013. Developed market interest rates should remain at the low end, Citi suggests, although Fed tapering will lead to a US ten-year Treasury yield of 3.45% by year-end, up from around 2.6% presently.
This rise in rates will prove a drag on the US equity market but Citi still expects equities to rise in both the US and Australia in 2014, albeit at a lower pace than in Europe, Japan and emerging markets. The strategists expect global earnings growth of 9%, led by Japan with 25%.
Citi notes global equities are currently trading on a trailing price/earnings of 17x, well up from the 2011 low of 12x but still in line with the long-run average. In other words, global equities are not expensive.
Citi “remains constructive” on global equities as an investment through to end-2014. Global bonds will sell off (yields rise), led by those of the UK and US. The strategists also expect commodities to break their direct link to other asset classes and restore their historical lack of correlation. This should re-awaken investor interest in the asset class, Citi suggests.
Saxo Bank does not match Credit Suisse’s enthusiasm for European markets. The European economy is likely to encounter further challenges in the June quarter, Saxo suggests, and by mid-year the ECB will have become sufficiently concerned about deflation to make good on its promise to implement QE-style measures.
The economic outlook might appear to be improving for Spain, Portugal and Greece but really this is just representative of an internal transfer of problems from “Club Med” to France and then Germany, Saxo warns. France and Germany are likely to suffer reduced export demand as Asian growth cools, and Germany is “likely to flirt with recession by year-end”.
Saxo is also worried about the political tide in Europe. The reality gap between European voters and their EU-friendly representatives is “wider than ever”. The analysts expect the status quo to be maintained after the May EU elections but believes EU-sceptic parties could form one of the biggest political blocs in the parliament and provide a challenge for “the failing EU experiment”.
Emerging economies have been hit by weaker currencies due to Fed tapering, Saxo notes, forcing governments to tighten belts and crimp growth in order to address the structural imbalances that have grown from easy US policy. The “Fragile Five” of South Africa, Brazil, India, Indonesia and Turkey have now become the “Fragile Eight” with the addition of Argentina, Chile and Russia. Restructuring will be positive in the long run, but in the shorter term there will be too many economies trying to simultaneously boost exports, Saxo suggests.
Global investment manager Standard Life Investments believes that although emerging market concerns have recently affected market sentiment, investors should remain confident about the longer term fundamentals that drive positive returns in portfolios. Retail investors continue to seek opportunities to move from fixed income and into equities and real estate but Standard Life suggests investors need to now shift their focus away from the big macro factors that have dominated global markets since the GFC.
“Helped by an improvement in capital spending as firms become more confident, the global economic recovery looks set to remain intact into 2014,” said Standard’s head of global strategy, in a recent press release. “It is our belief that investors now need to be as granular as possible in their thinking and an unconstrained approach would be more sensible than buying the whole index. Our funds are therefore becoming more focused in terms of regional and country sectors and stock selection”.
In other words, while Standard maintains its preference to be “heavy” in equities and real estate and “light” in fixed income, as global growth improves it will be essential to make the right investment choices within the asset classes. Equity investors need now concentrate more on the micro picture, or the “alpha” risk (influences that are specific to a stock or sector), rather than the macro picture, or “beta” risk (influences that impact on the equity market as a bloc).
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
