In the recent Fundamentals briefing, Legal and General Investment Management’s Head of Economics, Tim Drayson, examined the contrast in performance between the major economies and what this means for key asset classes next year. While some central banks, notably the US Federal Reserve, are likely to raise interest rates, others will continue to buy assets in an attempt to stimulate growth.
The global recovery continued in 2014, but failed to strengthen as expected. A number of factors kept growth in check – tighter fiscal policy in a number of countries, geopolitical tensions, bank deleveraging in the euro area and in emerging markets, attempts to either constrain credit growth or meet inflation targets held back growth. “Next year, we expect these headwinds to fade and global growth to gradually strengthen as monetary policy deviates further between the US and UK versus the euro area and Japan. US and UK growth is expected to maintain momentum while the drag from Japan’s VAT increase diminishes and China’s switch to policy loosening stabilises growth. Whilst the outlook for the euro area remains uncertain, further policy easing should support the economy”, said Tim.
This moderately positive outlook faces a number of risks. Global debt levels remain a concern and could be constraining growth. Deteriorating demographics, downshifting productivity growth, disinflationary fears all have the potential to restrict growth. Even if the recovery stays on track, the US Federal Reserve’s move to normalise policy could prove highly disruptive, particularly in emerging markets. “Not all of the risk is skewed to the downside. Although global growth has disappointed in recent years, there is still a chance that exceptionally loose monetary conditions could trigger an even stronger global investment accelerator cycle. Even if growth just improves in line with expectations, at around three percent next year, there are several asset classes that should benefit, with the obvious candidates being equities and UK commercial property”, concluded Tim.
