Global Investment Prospects and Strategy

Centrifugal and centripetal phenomena of a policy-, macro-financial- and event-specific nature will continue to operate this year and next on the global economy, limiting it to only a tentatively tepid improvement with just a handful of national economies surpassing the rest, emerging ones outdistancing their high-income rivals in real GDP terms and ratifying our asset allocation view of remaining indifferent between debt and equities classes and stressing US shares over those domiciled elsewhere.  Irrespective of some further modest re-equilibration among saving and consuming countries since the beginning of the Great Recession, expect only minor progress in reconciling growth and external gaps benefiting developing to the detriment of mature nations.

Central bank monetary policies of emerging and mature economies will proceed to diverge ever so gradually this year and next.  The credit policies of the Federal Reserve (Fed) and Bank of England (BoE) should stay on hold pending further improvement in labor market conditions as the European Central Bank (ECB) expands its debt purchases to sovereign issuance to counter deflationary pressures.  Loose monetary stances remain in place across much of Western and Eastern Europe – especially, in Sweden and Switzerland.  Central banks in Latin America will follow tight credit postures to steady currencies and slow rising living costs.  Fast growing Asian economies will keep credit tight as slowly expanding ones loosen policy or proceed to cut rates.

US real economic growth appears on course to grow at a faster pace than last year.  Fuel cost declines should translate into higher inflation-adjusted, disposable income and, consequently, elevate personal consumption, which – together with solid business fixed investment, and a narrower trade shortfall stemming from increased oil exports in spite of uncertainty with respect to Fed policy and anticipated stable-to-spending by the federal government.  New Zealand, too, is likely to experience hastier economic activity for roughly the same reasons, earning it – like the US – a firm overemphasis.  Exposures to Australian and Canadian shares, however, still warrant market-neutrality because both economies are reliant on natural resources demand.

Fraying ahead of 2016 national elections, the ruling political alliance of Conservative and Liberal Democratic parties would seem to face insuperable obstacles in terms of sustaining economic growth, maintaining budgetary discipline, fending off the populist, anti-European Independence party and, of course, winning the ballot come next year.  The headwinds to a re-election aside, the present coalition is likely to retain power, earning UK equities a bare one-point over-weight.  Swiss and German shares retain a one-point over-emphasis even though the former has drifted into and the latter is on the verge of entering deflationary territory.  Swedish stocks merit just a market-weight pending the outcome of the Riksbank’s actions to lift the economy from deflation.

Apart from the fact that the Nikkei’s one-year, forward price-earnings multiple of 18.8x appears expensive vis-a-vis all Group of Seven (G-7) and Asian markets (except India) on absolute and relative valuation bases, Japanese equities remain a resolute under-weight because aggressive monetary and fiscal stimuli have run their course and additional economic progress depends on the success of long-term reforms stipulated in the third arrow of Abenomics – eponymous of the nation’s leader (Prime Minister Shinzo Abe).  With few, if any, prospects for sustained economic growth, Japan offers foreign investors little in the way of a compelling reason for investing there.

All regions of the emerging world – Asia, Latin America and Central and Eastern Europe, Middle East and Africa (CEEMEA) – offer risk-fervent investors a full range of idiosyncratic equity investment alternatives.  Even Panama, a frontier market, presents a long-term opportunity with upside potential.  Asymmetrical economic patterns of developing countries should persist for the predictable future, advancing a consistently persuasive case for a discerningly selective strategy for investing in emerging stock markets.  Disparities in projected macro-economic growth rates nationally and regionally through 2016 distinguishes over- from under- and market-emphases.

Restoring normality to American and British credit policies should remain challenging for both the Fed and BoE regardless of progressively waning investor credibility in aggressive monetary stimulus.  Nevertheless, flattening US Treasury and UK gilt curves are forecast to undergo a measure of steepening unless the recoveries in both economies disappoint investors in failing to attain much faster trajectories of momentum and, as a consequence, and accelerate the pace of inflation.  In spite of market fears of deflation and concomitant skepticism over the necessity for raising policy rates, investing in diversified, high-quality instruments of short duration is advised.

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