This is an abstract from the Financial & Economic Outlook – Asset Allocation 2015 by Advantage Financial. Please click here to see the complete pdf document.
Recent data highlight a US economy that has stabilized and that shows signs of being able to sustain mild and consistent growth over the investment horizon. Nevertheless, clear signals of stalled growth in Europe, as well as an abrupt slowing in China and in a number of other emerging markets, and with the unwelcome weakness in Japan following the sales tax rise all indicate the need for more monetary stimulus in order to prevent outright deflation, particularly within the framework of debt sustainability.
All major central banks are oriented toward more measures to stimulate growth except the Fed which has initiated a pullback from its previous measures. The US central bank halted its purchases of securities and is directing the market towards expectations of monetary tightening beginning mid-2015. The Bank of England is also moving in the same direction.
The BOJ has now begun to accelerate its securities purchases and the ECB should soon complement its own program with sovereign bond purchases. The subsequent weakness in their currencies against the dollar will eventually lead to some recovery in these economies. Structural reforms will continue to be deepened and widened in both geographies as wells as in China.
Hopes are also rising that expansionary monetary policy will be more helpful to growth in China although the re-tooling and re-balancing of the economy remains the primary objective.
Emerging markets economies dependent on Chinese growth based on the old growth model may get a short-term bounce from stimulus, but longer-term the basis for growth in the new China model does not presage a return to the strong growth these basic materials-export economies were accustomed to in the past. The deep change to China’s development model will continue to render it necessary for countries in Latin America and Southeast Asia as well as Russia to continue to reform and restructure their economies.
The fall in the price of crude oil associated with the falloff in global aggregate demand and the abundance of supply has set the seeds of a recovery in aggregate demand in the industrialized countries as well as in many emerging economies. Commodity exporters will need to adjust to lower export receipts and the implications for their government budgets.
Falling inflation expectations and weak global demand have led to a cap on market interest rates of riskless securities and a compression in spreads on risky corporate and high yield debt in both developed and emerging markets. Whereas it is likely that rates will go higher over 2015 in the US and UK, thus dragging market rates higher and depressing returns of credit markets in those currency areas, it is likely that returns in the euro area as well as in Japan will not be as much affected apart from the volatility associated with specific periods of stress. In any case, fixed income markets will not repeat the strong returns of 2014. The dollar will continue to be the most favored currency amongst the majors followed by sterling. The yen and the euro will trade weaker over the course of the year following interest rate differentials.
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