- PineBridge Investments' Mid-Year Investment Outlook sees global economy as promising, with fundamentals returning to "normal" in developed world
- Global bonds have performed better than expected
- Emerging markets reinvigorated by rapid move towards reforms
- Eurozone continues gradual, broadening recovery as UK shines
- Japanese growth has been more volatile in first half of 2014, too soon to call trend
PineBridge Investments ("PineBridge"), a leading global multi-asset class investment manager, today released its Investment Outlook 2014 Mid-Year Update, which finds that through the first half of 2014 the global economy is looking more promising than predicted at the start of the year, with growth in the United States and developed nations accelerating faster than expected as fundamentals are returning to normal.
The PineBridge Mid-Year Update looks at how the global economy has performed as compared to predictions at the beginning of the year. Markus Schomer, Chief Economist at PineBridge Investments, believes that the outlook is increasingly looking up as the United States and the rest of the developed world continue to normalize while emerging markets are quickly progressing towards a new wave of reforms.
"Five months in and our conviction has strengthened that 2014 is the year that we can finally look forward to the evolution of the business cycle and stop looking over our shoulders for more financial crisis fall-out," Schomer said in the report. "One driver of change is the productivity ceiling. Businesses are increasingly using up slack resources and will need to increase investment and hiring to maintain productivity and profitability. In addition, it seems that the Congressional politicking that dominated the U.S. outlook in recent years is slipping into the background."
U.S. GDP growth so far in 2014 is tracking lower than PineBridge estimated in last November's Investment Outlook due to the unforeseen "Icy Patch" of harsh winter weather which slowed the U.S. economy in Q1. However PineBridge still anticipates that U.S. GDP growth will average 3% for the rest of the year, a notable change from the 2.25% average in the past four years.
Europe
The recovery in Europe has been led by strong performance by the UK over the past twelve months, with the UK economy growing at a 3% trend during that time, easily outperforming the U.S. and Eurozone.
"Europe is continuing its gradual recovery. Eurozone growth may not be running faster than we had envisioned last November, but the recovery is broadening. Most importantly, it has lifted the once-troubled periphery out of recession and equity markets in Spain, Italy, Portugal, Ireland and Greece are on average up 10% so far this year."
Japan
In the previous 2014 Investment Outlook, released in late 2013, PineBridge predicted that the Japanese government's planned consumption tax hike would cut the growth rate in half in 2014, which has played out as expected so far this year.
"Japan's growth trend has become more volatile in 2014. First quarter GDP growth surged nearly 6% as households and businesses brought spending forward ahead of the 1 April consumption tax hike," Schomer stated. "The most recent activity indicators show growth falling off of a cliff in the Spring, a direct effect of the tax hike."
Emerging Markets
Meanwhile, following a difficult period for emerging markets, many of the more vulnerable markets have moved more rapidly towards economic reform than expected.
"Emerging markets suffered a serious setback last year when a sudden increase in U.S. interest rates exposed the vulnerability of large and growing external deficits," Schomer stated. "We expected 2014 to remain dominated by the adjustment process. However, the narrative is changing more rapidly than we envisaged."
China
While growth in China seems to be slowing more rapidly than PineBridge predicted in the 2014 Investment Outlook, this slowdown is partially a side-effect of the government's attempt to address the private sector debt overhang, according to Schomer.
"Underneath the bearish headlines, China is actually very much part of what may become an emerging markets 'reform wave' in the coming years. Liberalizing capital markets and opening the Shanghai Free Trade Zone are just two examples of the rapidly changing economic environment in China."
Global Bonds
The PineBridge Mid-Year Update also notes that another surprise in the first part of this year is the strong performance of global bonds, led by the U.S. and Eurozone.
Schomer notes that, "U.S. Treasury yields peaked at 3% right before the Federal Reserve started to taper its third asset purchase program (QE3) at the start of the year. Since then, 10-year Treasury yields have declined more than 50 basis points – not the reaction we expected."
Looking Up
Overall, the Mid-Year Outlook declares that the global economy looks more promising than PineBridge projected last November. Markus Schomer notes that for the second half of 2014, investors should keep an eye out for a pick-up in global inflation potentially impacting emerging market bond yields.
