Monetary Reflation Continues and Global Growth Re synchronization Emerges
The macro theme of the fourth quarter and early 2014 is monetary reflation and global growth re synchronization. The Fed’s surprising decision to postpone tapering its QE program will likely encourage further risk-taking. In the meantime, we observe increasing signs of a synchronized improvement among the four important economies — the United States, Europe, Japan and China. The macro backdrop would imply equity price appreciation driven by continued earnings momentum and improving corporate profitability. We continue to suggest investors should overweight risk and underweight safety. The rally in bonds may last for a while based on the Fed decision to delay tapering, but the rebound is countertrend. A synchronized upturn in the world economy would limit the magnitude and duration of the bond rally. The dollar should have a weakening undertone as a result of Fed policy, but we do not expect any significant moves in the currency markets in the next several months. Some key emerging market currencies could recover from their oversold levels if the world economy strengthens and the Fed continues to show a dovish bias.
The global economy has demonstrated highly uneven and largely desynchronized dynamics over the last four years. The U.S. economy has been mostly stable since the recovery began four years ago, even though growth has been below trend.
Europe slumped into a classic “double-dip” recession. Japan’s economy struggled and barely stayed above water. The Chinese economy fluctuated wildly, moving from a potent upswing during 2009-2010 to a pronounced growth slowdown since 2011. Skepticism and negativity toward the world economy have become the predominant emotions in the investment community, and predictions of gloom and doom are sometimes a recurring theme. Nevertheless, the resilience of the world economy has surprised many investors. It seems the Chinese economy made a turn for the better this past summer. Europe also quietly reached a bottom when pessimism toward the region became the dominant emotion. The U.S. economy sailed through the sequester cuts without dipping into a fiscal abyss.
A Resilient World Economy Has Positive Macro Indicators
- U.S. A healthy portion of the major macro indicators show that the U.S. economy is gathering broad-based momentum, including an increase in manufacturing, rising capital goods orders and falling unemployment claims. Equities have outperformed bonds, a trend that has historically provided a leading signal for growth reacceleration. The housing market has cooled somewhat, but the recent rally in bonds should refuel activity.
- Europe The European economy has shown signs of broad-based bottom. The Eurozone seems to be moving out of its contraction phase and will likely return to positive growth early in 2014.
- Japan Abenomics is clearly having a positive impact as the economy is beginning to exit from deflation, and growth is showing fresh signs of revival. The Tankan survey of Japanese companies shows strength, business and consumer confidence are surging, and capital investment is making a turn for the better.
- China Since last summer, the Chinese government has been quietly easing monetary conditions, while continuing to pursue various supplyside reforms.The economy has subsequently stabilized. Leading indicators have turned up. Capital spending and consumer demand also continue to expand at a very healthy pace.
World economic progress also faces risks. Improvements have mostly been confined tole a ding economic indicators, rather than actual economic performance. Last month’s U.S.payroll numbers were underwhelming,and commodity prices, for industrial metals in particular, have stayed rather weak. The slump in certain emerging markets has continued. This means that a synchronized upturn in the world economy has remained a forecast or judgment rather than a confirmed trend. Regardless, more indicators seem to be pointing in the same direction. Some simultaneous acceleration in business activity is increasingly possible, although the magnitude remains uncertain.
In conclusion, reflation trades should work as a result of Fed policy and a possible resurgence of global growth. In this eventuality, equities should outperform bonds, high beta should outperform low beta, emerging markets should outperform developed markets, and cyclical sectors should outperform defensive sectors.
Beta is a measure of the variability of the change in the share price for a fund in relation to a change in the value of the fund’s market benchmark.
RISKS AND OTHER IMPORTANT CONSIDERATIONS
The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may notcome to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-investment-grade bonds involve heightened credit risk, liquidity risk, and potential for default. Foreign investing involves additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. Past performance is no guarantee of future results.
Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.
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