Significant US growth is driving the global recovery while eurozone growth remains modest.
Equity portfolios -- especially in US and Japanese markets -- to be favored
together with alternative investments.
In 2015, the global economic recovery will be driven by the United States while growth will be more contained in the eurozone as European governments seek to balance austerity and development. Meanwhile, next year in the Far East, Japan will continue to search for the most effective way out of the deflation it has experienced for 20 years and, among the emerging markets, China will maintain its growth thanks to a series of reforms aimed at increasing domestic consumption. India will benefit from the reforms introduced by its new government and the drop in oil prices, whereas economies with a strong export focus such as Korea and Taiwan will gain from improved U.S. performance.
These are the main macroeconomic forecasts detailed in "Market Compass", the outlook on 2015 prepared by UniCredit Global Investments to help investors ensure optimal asset allocation in the new year.
The United States as global driver: The outlook's estimated 3 percent growth in GDP in the United States is based on solid fundamentals and prospects. The increase in consumer spending and investments, improvements in the labor market, the drop in oil prices and recovery in the real estate sector all provide encouraging signs that could trigger a virtuous cycle. If forecasts of economic data are sustained, the Fed should in June approve its first rise in interest rates after years of expansionary monetary policy.
Modest growth in Europe: Growth estimates of 1 percent in GDP for the eurozone reflect Europe's challenging path to recovery. The easing in austerity policies in 2015 should leave more room for investments and the ECB might adopt a more expansionary monetary policy. Greater liquidity and a weaker euro should push consumer spending and exports. Forecast predicts, Germany will confirm its robustness, France will record slight growth, and Italy should emerge from recession after negative growth was yet again recorded in 2014.
Japan challenges deflation amid moderate optimism for emerging markets: A new anti-deflation monetary expansion policy will be introduced by Japan in 2015 while prospects for emerging countries in Asia remain moderately positive. China should grow by 7 percent, slightly down from 2014, showing less dependence on exports with an increase in domestic consumption. India will benefit from the drop in oil prices, which will result in less inflation. Geopolitical tensions surrounding Russia are being monitored, while Brazil is also carefully watched after Dilma Rouseff's reelection.
Based on these macroeconomic forecasts, UniCredit's Global Investment Strategy optimal asset allocation continues to tend towards equities and alternative funds instead of commodities, bonds and cash. The outlook on real estate is neutral. Among the currencies, a strong U.S. dollar is expected in the new year.
Equities: As far as the equities component goes, the recommendation is to favor the U.S., - where listings are not expensive and prospects regarding dividends are attractive - and Japan - where the currency devaluation should benefit exporting companies. However, the approach is neutral regarding the Pacific area excluding Japan and Europe, with a view that becomes positive in the case of the latter, if austerity policies abate and quantitative easing is introduced by the ECB. Underweighting for emerging markets is confirmed in this asset class.
Bonds: In view of the expectations on diverging monetary policies for the U.S., United Kingdom, eurozone and Japan, the recommendation is to maintain a negative position on U.S. government bonds, which remain vulnerable to the Fed's policy of gradually normalizing rates. A similar view is held on the government bonds of the core European countries and corporate bonds at the global level. The position on government bonds from Europe's peripheral countries is neutral. Bonds issued by emerging countries with solid fundamentals, especially those denominated in strong currencies, are to be favored.
Commodities: Forecasts suggest prudence, especially regarding oil and gold. Concerns around economic growth in Europe and China, the strength of the U.S. dollar, the surplus in cereal crops and the structural change in the supply/demand ratio were the main reasons for the weak trend in commodities in 2014. All these factors are expected to persist in 2015, and without any sustainable and prompt recovery in listings, interest will be limited for this entire asset class.
Real estate and alternative investments: In a scenario where rates will gradually normalize and yields will be closer to zero on monetary markets due to the ECB's more expansionary monetary policy, investments in flexible funds with a guaranteed return provide valid alternatives to the more traditional products specializing in fixed income and investments in liquidity. We should see an improvement in the real estate market, especially in the U.S.
Currencies: The U.S. dollar is expected to strengthen with respect to the euro, driven by the growth differential between the two areas and the diverging monetary policies of their respective central banks. The Japanese yen should also continue its downward trend following the additional accommodating measures introduced by the Bank of Japan.
What needs to be kept under control? Risks need to be monitored in the context of this scenario. Factors that need to be watched closely include a possible significant rise in U.S. bond yields that could hold back growth, a sudden slowdown in the Chinese economy and the potential of a deflationary spiral in Europe. In addition, geopolitical tensions involving Ukraine and the Middle East are to be monitored while the upcoming elections in Spain and Greece also need to be watched closely.
Milan, December 15, 2014
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