The global economy is in pretty stable shape. It’s not Olympian fit, but considering the wear and tear it has suffered during the past few years it is remarkably robust and should get stronger as long as it sticks to its recovery regime. This was the consensus view among a distinguished group of experts on the economic panel discussion that this writer had the pleasure of chairing last month at the Credit Suisse Asia Investment Conference (AIC) in Hong Kong.
The outlook for the most important major economies is neutral to positive and provides supportive conditions for leading developed and emerging equity markets. As usual, the US economy and monetary policy is the key to the health of other nations. The “US is in a state of repair,” according to one of the panelists, Richard W. Fisher, a former member of the US Federal Open Market Committee, so the Federal Reserve is likely to tread cautiously as it starts to raise interest rates. It will want to avoid threatening the recovery that has taken shape since the global financial crisis.
This is good news for global equity markets, which should be further buoyed by policies underway in other leading developed and emerging economies. In the European Union (EU), the worst is over and economy is on the way up. As José Manuel Barroso, former president of the European Commission, argued, trauma has brought the nations closer and the EU will be able to resist threats to its well-being such as a possible Greece secession. Markets have already been revitalised by a liquidity injection from the European Central Bank’s introduction of quantitative easing earlier this year.
Investors are rightly optimistic, and 45% of respondents to the regular sentiment survey we conducted for AIC participants, who included about 1,200 investors with more than US$18 trillion in assets under management, reckon European stock markets have the greatest upside this year. Sure, participants tipped Europe last year and were wrong. The Stoxx 50 fell 11% in 2014 (in US dollar terms), compared with a 12% gain for the S&P 500, but this year easy money favours European rather than US equities.
Expectations about Asia were also sanguine. About 23% of respondents favoured Asia (excluding Japan) and 12% tipped Japan (16% selected the US, which was down from 24% last year). More than two-thirds of survey respondents thought the MSCI Asia Pacific Index will return between 10% and 20% by the end of the year. China (A-shares) and India, like last year, were their favourites.
By country breakdown, survey participants most favoured China (A shares), India and Japan while the most underweight market picks were Australia, Pakistan and Malaysia. Meanwhile, China is going through a challenging phase, but the early signs are encouraging which should be positive for share prices.
The country is going through a structural shift from an investment- to consumer-led economy, pushed forward by a new political leadership that will be in place for the next decade. Analysts have worried since 2010 whether China will be able to make this transition successfully, and cope with lower annual GDP growth rates. Michael Pettis, a well-known Sinologist and finance professor at Peking University, told the AIC that China’s extraordinary growth rates will inevitably subside as the country struggles with its large debt burden.
In addition, vested interests are a major barrier to further liberalisation. China’s President Xi Jinping needs to defeat them in order to implement the next stage of reform – notably raising the proportion of household income-to-GDP. It is this objective that is motivating Xi’s anti-graft campaign, according to Pettis. China’s growth rate is certainly likely to decline, but the commitment to further liberalisation and adjustment to a new economic model is positive for markets.
Among other BRICS countries, India is entering a sweet spot, as described by Dr Duvvuri Subbarao, former Governor, Reserve Bank of India. Prime Minister Modi’s government is introducing radical changes to boost growth, contain inflation, maintain a stable external sector and attract the US$1 trillion needed to develop the country’s infrastructure over the next five years.
Even Japan, for decades the sick-man of Asia, is reaping the benefits of “Abenomics” reform. The terms of trade are improving with a weaker yen, lower oil prices are helping manufacturers and there are signs that long-needed inflation is emerging. There are, of course, rising geo-political risks and legitimate concerns about deflationary pressures throughout the world, as the AIC survey indicated.
However, reforms are underway in the world’s important economies, directed by determined policy makers and supported by accommodative central banks. As a result, the outlook for many equity markets this year is healthy.