Global growth to accelerate in 2014 but policy risks linger, says PineBridge Investments

USA - English

• USA - English

NEW YORK, Dec. 9, 2013 /PRNewswire/ -- The global economy will see a modest uptick in growth in 2014, with the US GDP growth accelerating to 2.6 percent as businesses increase investments, while the Eurozone and China maintain their current growth trajectory but politics, particularly in the United States, could hamper the recovery, according to global asset manager PineBridge Investments.

In its annual Investment Outlook report, PineBridge Investments also highlighted its asset allocation team's top picks for 2014 as Mexican private assets, Japanese equity and European credit. A rally in Mexican equities in the last 18 months is expected to have a positive impact on direct asset valuations.

Markus Schomer, Chief Economist at PineBridge Investments, believes rising capacity utilization and slowing productivity gains will increase the need for US businesses to invest, which should result in higher economic growth. But political wrangling over the debt ceiling could hamper corporate investment plans.

"The US has a key challenge for 2014 – to unleash the pent-up demand in the business sector," Schomer said in the report. "Political uncertainty has stalled that process, but we still expect investment spending to accelerate by the middle of 2014. Congress looks set to flirt with chance once more, after doing little more than kick the can down the road during its fiscal battle in October.

"In Europe and Japan, the key challenge for politicians remains to rebalance economic policy.

"In the Eurozone, austerity is likely to be eased as the fiscal situation improves, and monetary policy is expected to become more accommodative," said Schomer, predicting that the region's GDP growth will stay at the 1.2 percent average recorded since recession ended in early 2013.

"The main roadblock to faster growth is the on-going contraction in bank loans," Schomer said. "European Central Bank rate cuts may not be enough to unclog the lending channel."

In Japan, the government's planned consumption tax hike early next year to reduce the country's fiscal imbalance is likely to cut the growth rate by a half in 2014, and growth in coming years is likely to be dictated by the US Federal Reserve, rather than the Bank of Japan.

"We expect the eventual tightening of US monetary policy will trigger another round of export-boosting yen weakness," Schomer said.

PineBridge Investments' Chief Economist believes that China has successfully engineered a soft landing and GDP growth will stabilise at 7.5 percent in 2014.

"We do not believe growth will slow further from here," Schomer said. "On the contrary, a pickup in global growth should boost Chinese exports, which stalled in the second half of 2013."

Equities -- Overall strength and pockets of opportunity
Global equity markets could see significant inflows as interest rates rise, companies increase long-term investments and M&A activity perks up, according to the Investment Outlook. Robin Thorn, Head of Equities at PineBridge Investments, sees particular pockets of opportunity in Emerging Europe, which could benefit from increased exports and investments.

"Looking forward to 2014, we would encourage investors to embrace areas that will benefit from a more broad-based global recovery," Thorn said.

The fact that US and European equities have ended up giving similar performance in 2013, following strong outperformance by US equities in the first half of the year, is a positive sign.

"It typically means that the world is healing when the US, considered the 'safe haven,' lags the more cyclical European market," Thorn said. "We could be on track for a synchronized global growth environment that is not just dependent on the US economy as the engine."

Czech elections, Polish pension reform and Hungarian mortgage concerns have kept investors from deploying capital into the region in 2013. But with more clarity on these issues in 2014, PineBridge expects fund flows to return to the region as a way of playing the European recovery theme.

In China, PineBridge Investments expects sectors related to mass consumption, e-commerce and the environment to grow exponentially in the coming years in China, due to low penetration and policy support from the government.

Thorn believes the country will soon enter a 'Chinese Dream' era of prosperity following government implementation of a whole host of liberalization measures in 2013 and more far-reaching economic reforms in the area of government administration, banking, fiscal budgets, land registration, resource pricing, are expected. However, with hyper economic growth rates unlikely to return, investors in China need to focus more on bottom-up stock selection.

"This means not forgetting about emerging Europe as developed Europe finds its footing, seeking opportunities arising from the Chinese Dream and finding the beneficiaries of corporations extending their investment horizons. Even if the 'great rotation' from bonds to equities does not come to pass, we believe a subtle rotation is more than enough to keep equity markets celebrating as we move from the Chinese Zodiac year of the Snake into the year of the Horse."

Credit markets in transition
With the US Federal Reserve highly likely to begin to "taper" its bond-buying program in 2014, treasury yields are likely to rise, but with less volatility than in 2013, according to PineBridge Investments' Investment Outlook. The personal consumption expenditures (PCE) deflator, which has decelerated recently, is the most important clue to when tapering will begin, with a rise above 1.5 percent from the current 1.2 percent probably necessary.

"We believe the treasury market has largely priced in tapering, thanks to over-deterministic Fed communication," said Global Head of Credit and Fixed Income Steven Oh. "We expect the future trajectory of US long-term rates to resemble a staircase, with a period of discrete jumps – like we saw in May to August 2013 – followed by long periods of consolidation, similar to what we are currently experiencing."

Oh said fixed income investment managers should continue to shift exposure toward credit spread rather than duration – whether it is via investment grade corporates, bank loans and high yield bonds, or emerging market corporate and sovereign debt.

"There is slight upward pressure on the intermediate part of the yield curve and anchored short-term rates, but political and global growth headwinds are dampening overall upward pressure," Oh said. "While most credit spreads appear to be close to fair value, there is room for additional compression if we steer toward a more bullish part of the credit market cycle."

Private markets opportunity
PineBridge Investments believes private markets are poised to deliver strong returns and will experience significant liquidity in 2014, provided capital markets remain stable and modest global economic growth continues. Short-term threats include market reaction to the US Federal debt ceiling debate, scheduled for February, and the onset of Federal Reserve tapering of its bond-buying program and eventual shrinking of the Fed's balance sheet.

Due to specific sources of political and economic uncertainty in Europe, the Middle East and Asia, interesting opportunities have emerged – particularly for small and mid-market companies in Developed and Emerging Markets, as well as niches such as structured capital, growth capital, real estate and private credit.

While valuations in public markets have broadly recovered from their post financial crisis lows, anomalies persist in some private markets.

Top investment picks for 2014:

Mexican private assets
PineBridge Investments believes that Mexican private assets will perform well in 2014, following favourable economic reform pursued by the government, which has already pushed up equity prices over the last 18 months. While still favouring Mexican listed equity as a relative outperformer, PineBridge Investments sees very attractive opportunities in private credit, equity and infrastructure.

Japanese equity
Japan's political-economic backdrop could drive a continued rally in equities, according to PineBridge Investments. The country has reached a corporate consensus to redistribute part of earnings gains from currency depreciation as higher wages, which should largely offset the impact of consumption tax rises in the spring of 2014.

At a time when the Bank of Japan plans to extend if not accelerate quantitative easing throughout 2014, "Abenomics is still a glass three quarters full," the Investment Outlook report said.

European credit
With recession bottoming out, European banks still disintermediating themselves, and the European Central Bank needing to respond to very low inflation, the outlook should continue to improve for European credit, according to PineBridge Investments. However, given the current elevated euro, such positions should be hedged.

For further information please contact:

Brunswick Group
Beatriz Garcia / Alex Yankus – 212-333-3810

About PineBridge Investments
PineBridge is a global asset manager with over 60 years of experience in emerging and developed markets, delivering innovative alpha-oriented strategies across asset allocation, equities, fixed income and alternatives.  PineBridge manages over US $69.1bn in AUM worldwide as of 30 September 2013. What differentiates PineBridge is the integration of the on-the-ground knowledge with analytical insights, bridging global and local capabilities to deliver innovative products and solutions that create value for clients.

SOURCE PineBridge Investments