Economic indicators show positive movement in global markets, but managers attribute this to the after-effects of quantitative easing (QE) rather than genuine macroeconomic improvements.
Nigel Bolton, head of BlackRock European Equities, says: “Markets have continued to move higher this year as the forces of QE, through low interest rates, force investors to search out yields and returns.
“QE globally has been enhanced by the significant new measures emanating from Japan. This will have further implications for the yen’s weakness but should help the Japanese economy break out of its 20-year log jam. Weaker economic data from the US has been seen as a further reason for an extension of US QE policies, while the incoming governor of the Bank of England, Mark Carney, has already talked of further, more aggressive QE policies.”
The latest growth forecast from the National Institute of Economic and Social Research (Niesr) reveals an upward revision from three months ago for Japan to 2 per cent per year in 2013/14. But on a global basis the forecasts of 3.3 per cent growth in 2013 and 3.7 per cent in 2014 reflect a hesitant and uneven recovery.
Niesr states: “Prospects for the medium term are unusually uncertain. In many cases, progress with fiscal consolidation, private sector deleveraging, and the repair of financial sectors has far to go; all these factors form constraints on growth that may remain for several more years.”
However, Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, says that in spite of slowing global indicators, falling inflation is beneficial for US and Japanese stocks.
“Low inflation levels mean central banks can inject liquidity into the market if growth starts to slow. This easy policy means any downturns are likely to be less protracted and enhances prospects for growth, all of which equates to good news for equity markets,” he explains.
But Europe continues to be a cause for concern. Niesr forecasts growth of just 1 per cent next year as the region remains in recession.
Niesr states that Europe is “expected to remain in recession in 2013 and seems unlikely, on current policies, to experience better than weak growth next year”.
“There are major uncertainties about feasible progress towards completion of the economic and monetary union… and about progress with adjustment towards sustainable external and internal balances, including reasonably high levels of employment in the weakest economies.”
The latest European purchasing managers’ index figures show a deterioration for Germany, France and Italy.
Mr Bolton explains: “France, in particular, is seeing weakness as the government’s anti-competitive policies start to impact domestic demand and corporate behaviours. Political uncertainty, apparent in Italy, after an inconclusive election, and in Cyprus – where a banking collapse and an initial lack of cohesion around the funding of the country’s bailout – has again raised the spectre of the euro crisis.”
While this may be negative for economists, equity investors could benefit from valuation anomalies among European equities, as Mr Bolton points out: “The current soft patch in the equity market provides a good opportunity for investors to increase their weighting to European equities.”
