2014 Global GDP growth is expected to be better than in 2013, however, politics, especially in the US may undermine recovery.
The data comes from the latest Investment Outlook Report by PineBridge Investments.
The US economy is expected to grow by 2.6% in 2014, while the Eurozone countries and China maintain their current rates of expansion.
PineBridge Investments’ asset team’s top picks for 2014 are:
Chief Economist Markus Schomer sees the US growth accelerating as capacity utilization rises and productivity gains slow down, resulting in the need for businesses to invest.
2014 global GDP growth could be hampered by US politics
However, Schomer also warns that political brinkmanship could undermine US corporate investment plans and ultimately 2014 GDP growth.
“The US has a key challenge for 2014 – to unleash the pent-up demand in the business sector. Political uncertainty has stalled that process, but we still expect investment spending to accelerate by the middle of 2014.”
Congress looks set to flirt with chance once more, after doing little more than kick the can down the road during its fiscal battle in October.”
“In Europe and Japan, the key challenge for politicians remains to rebalance economic policy. In the Eurozone, austerity is likely to be eased as the fiscal situation improves, and monetary policy is expected to become more accommodative. The region’s GDP growth will stay at the 1.2 percent average recorded since recession ended in early 2013.”
“The main roadblock to faster growth is the on-going contraction in bank loans.”
“European Central Bank rate cuts may not be enough to unclog the lending channel.”
US Fed measures could weaken yen and boost Japanese exports
Japans sales tax increase in 2014 is expected to cut the country’s growth rate by half next year. Analysts see Japanese growth rates over the next few years as depending more on what the US Federal Reserve does rather than the Bank of Japan.
Schomer said “We expect the eventual tightening of US monetary policy will trigger another round of export-boosting yen weakness.”
The Chinese economy is expected to grow by 7.5% after a soft landing this year.
Regarding the Chinese economy, Schomer added “We do not believe growth will slow further from here. On the contrary, a pickup in global growth should boost Chinese exports, which stalled in the second half of 2013.”
Significant inflows forecast for global equities markets
As companies increase long-term investments, interest rates rise and M&A activities pick up, global equity markets could see considerable inflows, according to the report.
Head of Equities at PineBridge Investments, Robin Thorn, who sees some emerging economies in Eastern Europe as particular pockets of opportunity following increased investments and exports, said:
“Looking forward to 2014, we would encourage investors to embrace areas that will benefit from a more broad-based global recovery.”
European and US equities have ended up providing parallel performances this year, after strong outperformance by US equities during the first two quarters. Thorn sees this as a good sign.
Thorn explained: “It typically means that the world is healing when the US, considered the ‘safe haven,’ lags the more cyclical European market. We could be on track for a synchronized global growth environment that is not just dependent on the US economy as the engine.”
Investors have been reticent about deploying capital into Eastern Europe because of concerns about the Czech elections and Hungarian mortgage issues. However, as these issues become resolved in 2014, Pinebridge forecasts a return of capital flows into the region next year.
Chinese Dream era of prosperity
The following sectors are expected to grow ‘exponentially’ in China, due to “low penetration and policy support from the government”:
- The environment.
- Mass consumption.
Thorn sees the country at the threshold of a “Chinese Dream era of prosperity” as the government implements a range of far reaching reforms in the following areas:
- resource pricing
- land registration
- fiscal budgets
- banking, and
- government administration.
However, he doubts China will ever-again see another period of hyper-economic growth. Chinese investors need to concentrate more on bottom-up stock selection.
“This means not forgetting about emerging Europe as developed Europe finds its footing, seeking opportunities arising from the Chinese Dream and finding the beneficiaries of corporations extending their investment horizons. Even if the ‘great rotation’ from bonds to equities does not come to pass, we believe a subtle rotation is more than enough to keep equity markets celebrating as we move from the Chinese Zodiac year of the Snake into the year of the Horse.”
Credit markets in transition
As the US Federal Reserve starts scaling back on its $85 billion-per-month bond-buying stimulus program, the report sees treasury yields in 2014 rising, “but with less volatility than in 2013. The personal consumption expenditures (PCE) deflator, which has decelerated recently, is the most important clue to when tapering will begin, with a rise above 1.5 percent from the current 1.2 percent probably necessary.”
Steven Oh, Global Head of Credit and Fixed Income, said:
“We believe the treasury market has largely priced in tapering, thanks to over-deterministic Fed communication. We expect the future trajectory of US long-term rates to resemble a staircase, with a period of discrete jumps – like we saw in May to August 2013 – followed by long periods of consolidation, similar to what we are currently experiencing.”
Fixed income investment managers are advised to carry on shifting exposure toward credit spread instead of duration – whether it is through emerging market corporate and sovereign debt, bank loans and high yield bonds, or investment grade corporates, Oh added.
“There is slight upward pressure on the intermediate part of the yield curve and anchored short-term rates, but political and global growth headwinds are dampening overall upward pressure. While most credit spreads appear to be close to fair value, there is room for additional compression if we steer toward a more bullish part of the credit market cycle.”
2014 top investment picks:
Mexican private assets
Economic reforms being pushed through by the government should result in private assets performing well in 2014. They have already increased in value over the last 18 months.
According to the report, “While still favoring Mexican listed equity as a relative outperformer, PineBridge Investments sees very attractive opportunities in private credit, equity and infrastructure.”
The impact of the rise in sales tax in April of 2014 should be largely offset by higher wages “as the country reaches a corporate consensus to redistribute part of earnings gains from currency depreciation.”
The Bank of Japan plans to either extend or accelerate quantitative easing throughout 2014. According to the report, “Abenomics is still a glass three quarters full.”
With the recession seemingly over, the European Central Bank needing to address record-low inflation, and banks still disintermediating themselves, the outlook for European credit should continue to improve, the report forecasts. “However, given the current elevated euro, such positions should be hedged.”