A snapshot of global growth expectations in 2015 by APIH CIO, Mr. Pierre Moerland

pierre moerland apihIn 2014 we predicted that the financial markets would continue to face serious challenges and this was certainly the case as volatility returned to equity markets in the latter part of the year. This continued volatility along with shifts in sentiment, especially in emerging market economies, means that once again the global recovery faces a tough road ahead in 2015.

The good news is that growth in 2015 is expected to be stronger than in 2014, however, not quite as good as was forecast back in the WEO in October 2014. According to the IMF, global growth in 2015 is expected to be 3.5 percent, 0.2 more than last year, but 0.3 percent less than previously forecast. For 2016 a further increase in growth is expected of 3.7 percent, though again lower than previously forecast.

Though this is positive news at a global level, it doesn't however, reflect the reality at an individual country level. Whilst some countries show good signs of global growth, other countries don't and this, in conjunction with external factors and risks will affect overall global growth and each individual countries growth expectations. If we take a look at the United States for example, it has seen a solid recovery in its economy which is expected to continue and indeed it is the only major economy for which growth predictions have actually been raised. Japan on the other hand, showed disappointingly low growth rates last year and its potential growth rate remains very low as it continues to search for the most effective solution to the deflation it has been experiencing for a significant number of years.

A crucial development and hence why we should look at this first, is the change in monetary policy by the US Federal Reserve (Fed) expected by mid-year. The exact consequences of this change are still largely unknown, but it will certainly play a big role in the march of the global economy and in the performance of the financial markets. Contrary to other central banks, the Fed will reverse its 7-year policy stance and begin to move away from near-zero interest rates, as such, official interest rates will begin to increase. By progressively increasing its reference rates, the Fed can decrease all the excess liquidity that has been accrued since the start of the financial crisis, forcing higher interest rates on the fixed income markets. All assets are vulnerable to price corrections in such an environment, but especially fixed income assets. At the same time, the stock market will need to adapt to a higher interest rate situation, although with companies doing so much better thanks to the growing economy, the stock markets actual performance is difficult to ascertain. In contrast, the European Central Bank is embarking on a program directed at increasing liquidity dramatically with the aim of improving the European countries growth prospects. Another major factor shaping the markets is the oil industry. With the sudden decline in US$ oil prices driven by supply factors, consumer purchasing power increases along with private demand in oil-importing countries. On one hand, this is good news as it should boost global growth over the next couple of years, depending on how long oil prices remain at these cyclical low levels. On the other hand, for oil exporters and producers of new energy forms, this may cause a decrease in their level of government spending, which for exporters with smaller financial buffers, such as Russia for example, this is a big issue and will affect the country's economy. In addition, underlying demand growth has been slowing whilst supply has been increasing and with indicators pointing to a partial price recovery in coming years, this could have a negative impact on both investment and future capacity growth in the oil sector.

As European governments seek to balance austerity and growth, there is much to do and significant issues that remain unresolved in the Eurozone. The concern is that if Europe remains stuck with low growth and low inflation for a prolonged period, it will be even harder for some countries to reduce unemployment and excessive public and private debt. Re-structuring is required and stimulus provided, the labour market needs to grow, jobs be created and revenue generated, however, the debate remains ongoing regarding budget costs and growth initiatives. On a positive note, the weakening of the Euro and its depreciation will provide a much needed boost and push demand and consumer spending and an increase in output and exports. In terms of countries to monitor closely, Greece is high on the list following recent developments alongside Spain with its upcoming elections.

In emerging markets and developing economies, growth is projected to remain broadly stable at 4.3 percent in 2015 though again, this is weaker than predicted in the October 2014 WEO. In Japan as previously mentioned, we saw a disappointing level of growth as the economy fell into a technical recession in 3Q 2014 as neither private domestic nor foreign demand accelerated as expected. Though a new anti-deflation monetary expansion policy is due to be introduced in 2015, more structural and fiscal reforms are required to support a gradual rebound in activity. There has been a slowdown in the Chinese economy and China is predicted to grow at just below 7 percent in 2015, slightly down on 2014. With reforms aimed at pushing consumption and depending less on exportation, it should maintain its growth. However, with the sheer size and relevance of China, slower growth will have a huge impact on global growth and will directly affect its trader partners, especially those in the rest of Asia, hence the revisions made by the IMF to growth forecasts in much of emerging Asia. India looks set to remain on course, with its new government adopting reforms and benefiting from the drop in oil prices. The strong US market will benefit countries with a strong focus on export including Korea and Taiwan.

Geopolitical risks, uncertainties, conflicts and the risk of potential wars are also on the increase in 2015. In the past we have seen the benefits of globalization with the possibility to travel and do business on a global scale, so to some degree it now feels like we may be going backwards. We had expectations on how some of these countries and markets were going to expand but now we are left with huge uncertainties on how things will pan out and how to move forward. Many countries remain under the radar as these potential crisis place at risk their economies and growth and indeed global growth as a whole.

In summary, the markets are volatile and will be for the conceivable future. Forecasts depend on such a large number of factors that it's impossible to foresee and plan for everything, hence the re-adjustments as markets develop and progress throughout the year. At APIH our investors' confidence is crucial and we strive to ensure that we have the best contingency plans possible so as and when is required, we can make the necessary adjustments to our portfolios and strategies in alignment with the global market economy.

Pierre Moerland, Chief Investment Officer, Asia Pacific Investment House (APIH)
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