As we enter the latter part of the year, I expect to see clearer signs that the global economy has troughed and is picking up into 2015. The recovery has become increasingly dependent on the US to undertake the heavy lifting, where recent data still suggests that growth is on a solid footing. Whilst the Federal Reserve remains on track to hike rates, it is less likely to happen before mid-2015 as inflationary pressures remain well contained.
In Europe, inflation touched its lowest level since the midst of the crisis in 2009. Ultimately, I believe the region will avoid a prolonged Japan-style period of deflation and that economic conditions may force the ECB to do “whatever it takes”, including sovereign bond purchases. The early stages of buying corporate debt imply this outcome.
In China, while some recent data series have been soft, exports are showing traction and credit easing should assist the ongoing implementation of economic reforms. Whilst it would be premature to call a market trough, recent risk-aversion appears overly cautious and markets may be under-estimating positive fundamentals and the economic tailwinds implied by falling oil prices - a sustained decrease by USD10/barrel could imply a ~0.4% boost to global GDP. Low interest rates should continue to support risk assets generally and global equities in particular.
Fundamental risks include sustained weakness in Europe, any sharp change in Fed policy, and unpredictable risks such as ISIS, Ebola or the rece nt protests in Hong Kong.
