Op­ti­mistic Pre­dic­tions

Mark Mcfar­land, global chief economist for Coutts, shares in­sights on mar­ket be­hav­iour and eco­nomic growth for 2014/2015

Hong Kong Tatler - - Tatler Focus Coutts -

Coutts out­look for the year 2014/2015 is pos­i­tive. There is lit­tle sign of in­fla­tion or a need to quickly raise in­ter­est rates, and the global re­cov­ery ap­pears to be be­com­ing more wide­spread. Mean­while, emerg­ing mar­kets can com­pen­sate for weak­nesses in de­vel­oped mar­kets where gov­ern­ment debt lev­els have dou­bled since 2008.

In eco­nomic terms, the out­look favours North Amer­ica and Asia Pa­cific. The US is where bank­ing re­struc­tur­ing is at the most ad­vanced stage among de­vel­oped na­tions, while Asia Pa­cific is the group of coun­tries that is likely to ben­e­fit most from a re­vival in in­ter­na­tional trade driven by con­sumers in the US and in China.

Growth and pol­icy mak­ing will be as im­por­tant in 2015 as eco­nomic re­cov­ery. Growth in the US and Europe has been weak since 2008, par­tic­u­larly when com­pared with his­tor­i­cal lev­els. Com­pa­nies have yet to show enough con­fi­dence in the fu­ture to start in­vest­ing in peo­ple and ma­chin­ery again.

And while the US eq­uity mar­ket has pow­ered through record highs and business sur­veys are very op­ti­mistic, the level of un­em­ploy­ment is still very high. In fact it is over 10 per cent of the US labour force, if all the peo­ple who have given up look­ing for work are con­sid­ered. The Euro­pean re­cov­ery has been even less con­vinc­ing, for the same rea­sons. Both have re­lied heav­ily on low in­ter­est rates and quan­ti­ta­tive eas­ing, where cen­tral banks buy newly is­sued gov­ern­ment bonds to keep in­ter­est rates low and of­fer cheap fund­ing to banks and cor­po­rates.

Europe, in par­tic­u­lar, has a very rigid po­lit­i­cal sys­tem that makes deep re­form hard. For this rea­son, most of the op­por­tu­ni­ties are out­side Europe.

Global ef­fects

Out­side the de­vel­oped na­tions, two themes will be hugely im­por­tant over the next 18 months. Firstly, the re­turn of US dol­lar in­ter­est rates to a more nor­mal level could have a big im­pact on mar­kets in 2015, but we be­lieve that it will be less than is feared. In 2013, the then chair­man of the Fed­eral Re­serve, Ben Ber­nanke, only had to give the im­pres­sion that the US cen­tral bank was think­ing of start­ing that jour­ney be­fore mar­kets and economies were hit.

Geopo­lit­i­cal risk also will have a very sig­nif­i­cant role in shap­ing events through­out mar­kets out­side the G7. Res­o­lu­tion of the cri­sis in Ukraine will have a very large ef­fect on how de­vel­oped mar­kets deal and trade with OPEC’S largest oil pro­ducer.

Po­lit­i­cal re­la­tions be­tween the US and Iran could evolve much more peace­fully to the ben­e­fit of the Mid­dle East and south­ern Europe par­tic­u­larly. Elec­tions in Brazil and Ar­gentina will di­rect the forces of eco­nomic re­form in Latin Amer­ica. There is po­ten­tial in each of th­ese cases.

In Asia, In­dia’s move­ment away from so­cial­ism to­wards more mar­ket-driven re­forms, Ja­pan’s shaky at­tempts to im­ple­ment eco­nomic re­forms, China’s re­forms and an­ticor­rup­tion drive, and a pick up in global trade will have a big im­pact on growth in the re­gion. Trade and in­ter­na­tional fi­nance are in­tri­cately linked in mar­kets with large ex­port sec­tors. The im­proved US out­look should mean that banks will be more will­ing to lend to Asia’s ex­porters. That’s good for growth around the re­gion.

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