Global economic forecast: An inflection point, not a turning point

September 25, 2015 Categories: Markets


Investors have had a lot to digest in recent months:

The U.S. Federal Reserve’s “will they/won’t they” dance with raising interest rates (they didn’t, as my colleague noted last week on the blog); wild stock gyrations in China; and tumult in U.S. equities. But what’s the big picture? Our soon-to-be released Global Market Outlook – 4th Quarter Update looks past recent headlines to offer some analysis for the coming months.

In short, our investment strategy process is built on three building blocks: Value, the business cycle, and sentiment. When we view the world through the lens of these elements, here is what we see:

  • Value. Despite recent drops, U.S. equities remain expensive. Equities in Japan and Europe are moderately expensive. Emerging markets can offer some bargains.
  • Cycle. We’re still fairly upbeat about the U.S. cycle, although our optimism has been reduced a little due to modest earnings per share prospects and still-imminent Fed tightening of its monetary policy. We think the cycle is more positive in Japan, where earnings-per-share growth is strong and we expect the Bank of Japan to pursue expansionary policies. For the strongest cycle indicators, look to Europe —tailwinds there include currency depreciation, credit growth, easing austerity, and quantitative easing by the European Central Bank. Meanwhile, falling commodity prices, China’s slowdown, and the strong U.S. dollar could all spell trouble for emerging markets.
  • Sentiment. We’re seeing neutral momentum across most equity markets, and negative for the United Kingdom and emerging markets. Our contrarian indicators, on the other hand, suggest that most markets are oversold after steep drops late in the summer.

Given all that, Europe remains our preferred equity market. Right behind it, Japan. We’re more cautious about the U.S., U.K., and emerging markets.

Now, to take a look at China. Clearly problems there were at least partly responsible for the Fed’s September decision to keep interest rates near zero. We’ve seen weak economic data out of China, made worse by the government’s botched efforts to stabilize equity markets. Still, as a colleague recently noted, we expect things to settle out there this fall. Growth in China may even eventually rebound to around 7%, as government stimulus efforts gain traction. We also expect the Fed to still raise interest rates in 2015, even if China stays volatile. Job growth in the U.S. remains strong, and is probably close to the point where wage growth triggers inflation.

We’re certainly apt to see more market volatility in the months ahead. Medium-term, though, we maintain a pretty positive view about the U.S. and global economies. In our view, markets are at more of an inflection point than turning point. And dips could create potential buying opportunities. Look to the Global Market Outlook for more detail, with our quarterly update being issued next week.


Andrew Pease, Global Head of Investment Strategy

Andrew Pease

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