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

October 1, 2015 Categories: Economic Insights
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Global Economic Forecast

Each quarter, Russell’s global team of investment strategists updates our Annual Global Outlook, which outlines our views and expectations for the global markets and economies for the year.

Russell’s Global Head of Investment Strategy, Andrew Pease, recently wrote a blog post looking at global economies through the lens of value, cycle and sentiment to help investors see what might be ahead. You can read the full post below or on the Russell Blog.

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 Global Market Outlook4th 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 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 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. Markets in our view are at more of an inflection point than turning point. And dips could create potential buying opportunities. Look to our latest Global Market Outlook for more detail.

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.Investing involves risk and principal loss is possible.

Forecasting is inherently uncertain and may be incorrect. It is not representative of a projection of the stock market, or of any specific investment.

Investments in non-U.S. markets can involve risks of currency fluctuation, political and economic instability, different accounting standards and foreign taxation.

Russell Investments is the owner of the trademarks, service marks and copyrights related to its indexes.

Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is a subsidiary of London Stock Exchange Group.

Copyright © Russell Investments 2015. All rights reserved.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.

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