The global recovery will continue moderately against the background of loose monetary and budgetary policy and lower energy prices. China’s economy is showing early signs of improvement following earlier stimulus measures. Moreover, leading indicators show that economic activity in most parts of the developed world remains resilient.
At the same time, however, global growth levels are likely to remain fairly subdued. The divergence between decently performing developed markets and struggling emerging markets is expected to persist next year, although the latter group is likely to feel ground beneath its feet again.
Despite the policy rate hike in the US, the first one since 2006, global monetary conditions look set to remain very loose. While the Fed and the Bank of England will start to tighten policy, the ECB, the Bank of Japan and the People’s Bank of China are adding to monetary stimulus. Moreover, central bankers in the US and Britain are likely to adopt a very cautious stance. On the currency side, there are major reasons why a stronger dollar should not be taken for granted.
The two most important risks remain a faster than expected monetary policy tightening in the US, and a hard landing in China. These risks would particularly affect emerging countries, like commodity exporters (Colombia, Russia, Chile or Malaysia) or countries running large current account deficits (Turkey and South Africa).
Closer to home, the Greek situation remains worrying. Although funding is secured following the agreement reached in July, further imposed budgetary tightening will keep Greece mired in a recession with unemployment and public debt at unsustainably high levels.
The financial year ahead should mark the continuation of the major trends in asset allocation in 2015.
Equities preferred over fixed income
Interest rates are expected to remain at historically low levels in developed countries. Consequently, the expected returns on equities retain their relative attractiveness in a general context of moderate growth.
Europe preferred for geographical allocation of equity investments
European companies benefit from low interest rates, a gradual economic growth and a weakening of the euro against major foreign currencies. These elements support the recovery in earnings growth. This recovery has fallen behind following the euro crisis. US equities offer a more limited potential following the impact of reverse factors. They are also more expensive than European equities.
Emerging market equities should perform in line with their long-term potential, pulled between the low valuation of the stocks prices and the continuing deterioration of the prospects for corporate profits in the region.
Renewed interest in inflation-linked bonds
Despite their low yields, bonds still deserve their place in any balanced portfolio. We continue to give special attention to inflation linked-bonds, especially in Anglo-Saxon countries that should observe the first pressure on prices and wages.