Uneven Global Recovery will Continue with US Leading the Pack

Jan 9, 2015

For Immediate Release

Hong Kong, January 9, 2015 - A striking feature of this year or next will be the marked divergence in the monetary stance between central banks in the US and the UK and their counterparts in Japan and the Eurozone. While the Fed and the Bank of England are likely to raise interest rates in the second half of 2015, the European Central Bank (ECB) and the Bank of Japan are expected to continue asset purchases and zero interest rates. We should be careful in understanding the forces behind rising rates, whether they are from economies returning to normal and tighter monetary policy or commercial banks expanding bank credit rapidly, for the latter would mean the rising rates may not be from tight money supply," says Dr. John Greenwood, Chief Economist, Invesco.

Greenwood expects growth in the Eurozone to remain anemic as there are no indicators -monetary, fiscal or structural - pointing to the start of a genuine business cycle upturn. To avoid deflation, Greenwood submits, the ECB must encourage a greater extent of currency depreciation and/or ensure notably faster growth of money and credit.

Greenwood credits the Fed for its prolonged supportive monetary policy bracing the US recovery. The balance sheet repair by the household and financial sectors is near complete, US GDP growth has now returned to the past norms of 3.0% to 3.5%. "Commercial banks appear willing to and capable of continuing to expand credit without the Fed's assistance," Greenwood says. Strong bank credit growth, favorable labor market indicators and strengthening output and investment data all suggested that the US economy is on a self-sustained recovery, relying no more on the Fed purchasing assets. He projects a 3.1% real GDP growth in 2015 for the US.

In Japan, the combination of quantitative and qualitative easing measures from the Bank of Japan has failed to boost the balance sheet of commercial banks. At the same time, personal consumption expenditure contracted with the increase in consumption tax effective in April and trade and current accounts also continue to deteriorate, dragging down growth. All these factors considered, Greenwood expects a mere 0.8% real GDP growth for the country in 2015. Until Abenomics starts to deliver on its better promises, Greenwood expects the Japanese economy to stay sluggish.

As for China, her main problems have been the build-up of excessive domestic debts posing restraint on credit growth and the slow growing international economy that impedes her export performance. China's growth is likely to continue to dwindle in 2015 as the country gradually transforms from an investment- and export-led economy into one driven by domestic demands. Greenwood expects China's official real GDP to slow to 6.5% in 2015.

Growth also remains weak in other emerging markets, most notably in Brazil, India and Russia, all experiencing slowdown in growth, especially in terms of export. Most emerging markets are waiting for the US and the euro area to recover and revive their export-led growth, but they are likely to be disappointed," Greenwood says.

At the absence of forward guidance from the US Federal Reserve Board, increased volatility and lower liquidity are expected in 2015, says Paul Chan, Chief Investment Officer, Asia ex-Japan, Invesco. Chan believes that the chase for yields in a low growth, low rates and volatile environment continues for investors, and that equities bull market will prevail but at a slower pace.

Chan says US equities and the US dollar are going to lead other markets. "Bcth the US economy and US dollar are rebounding at a rate faster than the rest of the world. US equities are trading at fair value, and investors should note that there are a considerable number of quality companies in the US market. Investors should focus on companies with successful cost control and efficient capital allocation polides," Chan explains.

Markets around the world are in the restoring phase of the business cycle, meaning economic activities, production and investment are picking up steadily. In addition, commodity prices, especially oil price, are returning to pre-crisis levels, and in return allowing most oil importing countries in Asia, particularly the ASEAN countries, to lower cost.

"The new leadership in China, India and Indonesia promulgates positive reform direction to their respective countries. With valuations of Asian ex-Japan equities now at historical bottom, I see investment opportunities in selected quality names in Asia. On the other hand, the headwinds for Asian equities will come primarily from the appreciating US dollar pushing up production and export cost for China and other Asian countries. Domestic industries also need to transform if they are to see re-rating. One crucial change that Asian companies need to consider is the adoption of technology, an area that most companies in the region are still lagging behind," Chan says.

Low inflation rates and strong US dollars are the main themes for fixed income investment in 2015. Although the Federal Reserve may raise short-term interest rates, long-term yields in the US are unlikely to rise extensively when inflation remains low. Meanwhile, China, Australia and India are likely to have interest rates cut. The US dollar may strengthen against Euro, Japanese yen, commodities currencies, including Australian dollar and Canadian dollar, as well as most emerging market currencies.

"While most emerging market and major currencies are likely to weaken, I believe the Chinese yuan and Indian rupee will remain more or less stable against the US dollar, if the economic reform momentum in both countries prevails," says Ken Hu, Chief Investment Officer, Fixed Income, Asia Pacific, Invesco.

Corporate bonds of both high grades and high yields offer investment opportunities when inflation is low; however, investors may face higher market volatility.

"In emerging markets, bonds from the commodities consumption side offer opportunities, while the ones from commodities production side may not," explains Hu.

"We see opportunities in both onshore and offshore Chinese yuan bonds, except for onshore Chinese yuan high yield bonds due to the rising corporate default and distress rates in the onshore bond market. In addition, Indian domestic bond market has just entered a bull market. High yields, disinflation and inexpensive Indian rupee make the asset class attractive," Hu adds.

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