(October 28, 2013) — Despite an overall positive outlook for global markets, Russell Investments announced “short-sighted politicians” could stir market volatility and even decelerate growth.
In Russell’s fourth quarter “Strategists’ outlook and barometer,” economists, strategists, and analysts found the US Federal Reserve’s quantitative easing (QE) tapering to have minimal impact on asset prices.
“QE has more closely resembled pushing on a string than an irresponsible act of market distortion,” the report said. “The eventual winding down of QE will generate volatility, but there is little evidence that the Fed has significantly distorted asset prices.” It also stated stable economic growth, low inflation, and deleveraging by the private sector had helped avoid a devastating effect on the markets.
However, a US political tug-of-war remains a great threat to economic recovery, Russell said.
“The eleventh-hour deal we have just witnessed is just another round of Congressional ‘kick the can,’” said Mike Dueker, chief economist at Russell.
According to the report, policy mistakes could cause anxiety in the bond markets as well as a decline in confidence in the US economy. But the biggest problem of all was a possible halt in the “momentum” of the economy.
If politicians could reach a reasonable fiscal deal, Russell said the US could expect to see almost 3% growth and an average of 200,000 more jobs per month next year. It also predicted 10-year US treasury yields would reach 2.8% in the first quarter of 2014 and 3.2% by the end of the year.
Russell also said it preferred US equities over fixed income, and European equities over US equities.
Looking outside of the US, Russell said relatively positive projections for the Eurozone. Successfully exiting the recession last quarter, the Eurozone is expected to experience growth between 0.5% to 1% in 2014. The less-than-great figure may be due to the political muddle of Greek and Portuguese bailouts as well as difficulties facing the adaptation of a European banking union, the report said.
But vigilance is necessary, Russell concluded. “We warn against being complacent, as none of the region’s key long-term problems have been solved: The periphery is still stuck in its debt trap, the banking sector is week and not lending, growth is insufficient to lower debt burdens and/or unemployment rates, and structural reforms are largely nonexistent.”
The outlook was slightly better for Japan, with money growth at 3% year-on-year at the end of the third quarter and a real GDP growth at 4%. Asia-Pacific is in good shape, Russell added, in both balance sheet and current accounts: “The region as a whole (both economies and markets) would, in our view, respond well to any acceleration in US and/or European growth in 2014.”
Emerging markets are expected to perform well—at the end of September this year, they were trading at a 25% discount to developed markets. While they might experience mild turbulence as the Fed resumes talks of tapering, Russell projected their growth to be in the low double-digits in 2014.
“The impact of the political fireworks in the United States and geopolitical risks have meant buying opportunities in the US equity markets for those nimble enough to capitalize on the resulting volatility, though our recommendation to the less agile and more risk averse remains equity overweight,” said Doug Gordon, senior investment strategist for North America at Russell.
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