Russell Investments has released its latest quarterly outlook for the global capital markets, predicting modest gains for equity markets and higher bond yields in 2014 as the world’s major economies continue to grow.
The fourth-quarter Strategists’ Outlook & Barometer offers in-depth analysis of key economic and market indicators from Russell’s global team of investment strategists, whose insights help to guide the fir’s multi-asset portfolios and services.
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In the report, Russell’s strategists note that politicians and policy likely remain the biggest threats to economic recovery, and they point to US monetary policy and political pressures worldwide that could impact the 2014 performance of various asset classes.
Doug Gordon, senior investment strategist for North America at Russell, said: "As investment strategists we are normally presented with a difficult task of forecasting capital markets, but this task seems far easier than the recent near impossible one of forecasting politicians. Looking at the path ahead we believe additional volatility may continue, but this could be leveraged as an opportunity to increase tactical equity positions, such as within multi-asset portfolios."
Russell’s strategists continue to favor equities over fixed income, and they remain moderately positive on equity markets globally. Looking regionally, the strategists continue to prefer European equities over US equities, and they believe emerging market equities look increasingly more positive, possibly offering double-digit earnings growth in 2014.
Andrew Pease, global head of investment strategy at Russell, said: "As we look toward 2014 we’re forecasting synchronized growth across the U.S., Japan and Europe for the first time since 2010. We also see a strengthening low-inflation recovery that favors equities over bonds, despite relatively full equity market valuations."
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By GlobalDataQE has minimal impact on portfolio guidance
Regarding Quantitative Easing (QE), it has had little influence on the portfolio weighting guidance suggested by Russell’s investment strategists. When the winding down of QE eventually happens, they expect it to trigger some market volatility; however, they do not believe the US Federal Reserve has significantly distorted asset prices.
In fact, they see little evidence that QE has pushed asset prices beyond levels that can be justified by the current combination of stable economic growth, low inflation and moderate corporate earnings growth.
No silver economic lining for US if fiscal tightening continues in 2014
Russell’s strategists underscore that though the US economy is currently in the midst of a reasonably sturdy expansion, policy mistakes remain the biggest obstacles.
Mike Dueker, chief economist at Russell Investments, said: "The eleventh-hour deal we have just witnessed is just another round of Congressional ‘kick the can."
The impact of fiscal tightening that kicked off 2013 means that real Gross Domestic Product (GDP) growth will likely end up at 1.6% this year. The US economy needs a solid 2014 to ratify this year’s equity market gains, according to the strategists. Without significant fiscal tightening, the US could possibly achieve nearly 3% growth in 2014, with job gains averaging 200,000 per month over the next 24 months.
Other highlights of their 2014 US outlook include:
- By the end of Q3 2014, the 10-year Treasury should yield 3.2%.
- Forecasted year-on-year real GDP growth of 2.9% for 2014.
- Resist complacency about the recession-free Eurozone
While Eurozone equities still appear relatively cheap and capital continues to flow amid the easy monetary policy of the European Central Bank (ECB), Russell’s strategists caution that vigilance is still warranted. Since the Eurozone’s key long-term problems have not been solved, these positives only marginally outweigh the negatives.
The strategists believe risks to the Eurozone are also political and fiscal. German Chancellor Angela Merkel’s reelection, they suggest, does not help the peripheral economies of Greece and Portugal, which still need support and debt forgiveness but are unlikely to get it under her leadership.
Issues related to setting up a European banking union are even more worrisome, and could erase the current optimism if the implementation is mismanaged.
All things considered, the Eurozone did leave recession in the third quarter of 2013, and the strategists expect economic growth to remain positive, but lackluster, in 2014 at between 0.5% and 1%.
Asia-Pacific optimism, particularly for Japan
The investment climate continue to change for the better in Japan, the strategists believe, as newly elected Prime Minister Shinzo Abe appears successful in turning the economy around. Though stimulus and spending challenges remain, real GDP is at 4%, and monetary growth is at 3% year-on-year at the end of the third quarter, after bottoming near zero at the top of 2013.
Elsewhere, Russell strategists say that China’s economic rebalancing trick is performing as it should, and the Asia-Pacific region as a whole appears poised to respond positively to acceleration in either US or European growth in 2014.
Relative-return barometer
Russell’s strategists examine key global asset class pairings to determine which in each pair currently signals better return prospects.
Gordon said: "The impact of the political fireworks in the United States and geopolitical risks have meant buying opportunities in the U.S. equity markets for those nimble enough to capitalize on the resulting volatility, though our recommendation to the less agile and more risk averse remains equity overweight. Though we’re considerably less bullish long-term than earlier in the year, we still prefer U.S. equities over fixed income. Improving growth prospects reinforce our strategy to use market pullbacks as buying opportunities."
