Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Aviva Investors’ Stewart Robertson gives his views on the global economic outlook.
The outlook for the global economy still looks encouraging with buoyant US output trumping recessionary pressures in the euro zone and a slowdown in China. Annual global growth should average between 3 and 4% over the next three years.
The improving domestic economic background should enhance the yield advantage of the US dollar against most of its peers. We believe the dollar is in the midst of a multi-year upswing, aiding potential outperformance of developed equity markets against emerging peers.
With US growth improving and inflation looking more and more likely to head higher, we expect the Fed to hike interest rates in the second quarter of 2015, which is faster than consensus market expectations.
As the economic outlooks for the US, UK, Europe and Japan increasingly diverge, monetary policy expectations between the areas are decoupling. We expect the ECB to conduct outright QE to boost growth and avoid deflation, but doubt this will happen until well into 2015. As a result, we expect Eurozone rates to remain low for longer than consensus expects. Japanese growth prospects deteriorated in the second quarter. If weakness persists, we believe more stimulus measures will be needed to meet their targets for growth and inflation.
Positioning for Policy Divergence
Equities have typically struggled in the six months preceding an initial hike in US rates, while credit faces the headwind of rising US bond yields, leading to our overall neutral stance on equities and credit. Despite this, the outlook in some regions looks far more favourable than others. European and Japanese equities have better prospects over the medium term, as both should benefit from the further accommodative monetary policy expected in their economies.
Euro-zone sovereign bonds could offer better potential returns than other major sovereigns, with the outlook for growth and inflation in the currency bloc weak while the outlook for other developed economies looks better.
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