Divergence will be a major economic theme in 2015, with different parts of the world experiencing “boom, gloom or doom”, market commentators say.
Mohamed El-Erian, the chief economic adviser of Allianz, a multinational financial services company, dubbed 2015 “a year of divergence” in an article on an economic commentary website, projectsyndicate.org.
He says the “multi-speed” global economy will be dominated by four groups: the United States, China, Europe and “wild card” countries, notably Russia and Brazil, whose size and commercial and financial connections can influence the global economy.
In a recent article, US analysts Worth Wray and John Mauldin say the US is experiencing a boom (or as much of a boom as you can expect in a country with massive government debt), while gloom characterises Europe and China and, possibly, Japan, where the economic policies of Prime Minister Abe Shinzo may fail. Wray says there is doom in emerging markets, which may suffer if foreign investments are withdrawn in favour of developed countries and currencies, and in commodity markets, particularly oil.
El-Erian says the performance of the US economy will strengthen in 2015 as employment and wages rise.
In China, growth will stabilise at a lower rate than in the past, and the country will gradually restructure its economy to make growth more sustainable, he says.
El-Erian says Europe will struggle as economic stagnation fuels social and political disenchantment in some countries and complicates regional policy decisions. Anaemic growth, deflationary forces and pockets of excessive indebtedness will hamper investment, tilting the balance of risk to the downside. In the most challenged economies, unemployment will remain high and persistent, he says.
As “wild cards”, the success or failure of the economies of Russia and Brazil depends on the decisions that their respective presidents make on Ukraine and macroeconomic policy, El-Erian says.
While El-Erian and Wray’s descriptions provide a quick insight into the world economy, divergence creates investment opportunities for fund managers – and generates differences of opinion among them.
Templeton’s global equity managers say they are positive about the outlook for active asset management in 2015, because the gradual withdrawal of, or a more targeted approach to, monetary stimulus programmes will make the differences between economies, markets and shares more significant.
Norman Boersma, Templeton’s chief investment officer, and Cindy Sweeting, the director of portfolio management, say while unprecedented central bank support in the aftermath of the global financial crisis was like an incoming tide that floated all boats, there will be more opportunities for active managers in 2015 and beyond.
Among the opportunities that Boersma and Sweeting identify are selected European shares. They believe the establishment of a pan-European banking union supervised by the European Central Bank will restore confidence in, and improve the liquidity of, the European financial system.
Compared with its developed-market peers, Europe has the best chance of benefiting from monetary and government policies, and many European companies are globally competitive, with geographically diverse revenues, they say.
Whereas Boersma and Sweeting say value appears to remain relatively scarce in Japan, Urvesh Desai, the portfolio manager and strategist for the Old Mutual Investment Group’s Macro Solutions division, says the current valuation levels of Japanese equities (the prices of shares relative to their expected future earnings) make for “a compelling picture that has not been seen for some time”.
Desai says that Japan’s quantitative easing programme, relative to the size of its economy, will be the largest in the world.
The stimulus programme has weakened the currency, Desai says, and this will be good for the export-related sectors of the equity market, but it will not make a significant contribution to Japan’s economic prospects.
He also says Japan has recently been making a concerted effort to improve the return on equity delivered by its companies.
Boersma and Sweeting believe the US is a stock-pickers’ market, because it has made the most progress in its economic recovery, and overall equity share valuations at the end of 2014 reflected this.
However, they say the US equity market is deep and diverse and they are still finding what they regard as bargains in certain sectors.
It is expected that interest rates in the US will start to increase in the third quarter, but low US inflation, a strong dollar and a slowly improving labour market are expected to delay significant rate increases for some time.
Mark Mobius, the executive chairman of Templeton Emerging Markets Group, remains positive about emerging markets, saying that, despite weak economies in countries such as Russia and Brazil, overall economic growth in emerging markets will exceed that of developed markets.
Mobius is also upbeat about significant reforms in many emerging markets, among them China, India, Indonesia, Mexico and South Korea. The reforms aim to tilt these economies away from export- and investment-heavy activities and orientate them towards meeting the demand for consumer goods.
He also expects new technologies to accelerate growth in emerging markets, particularly in Africa.