ING Investment Management (ING IM) is foreseeing global economic growth of over three per cent for 2014 and believes that the current recovery is the most sustainable since the financial crisis began.
Despite some disappointing readings in the first quarter, economic growth seems to be broadening globally with a rising number of regions finally getting ‘out of the mud’.
However, it warns that risks will (always) remain and a more rocky ride for investors might well materialise going forward once uncertainty over the outlook for monetary policy in the US and UK increases again or China risks intensify. With respect to the latter, the sharp correction in the real estate sector has created a serious downside risk to economic growth, and it has also increased pressure on the country’s financial system.
At its Mid-Year Outlook Conference held in London on 2 July 2014, the investment manager pointed to a number of positive developments, such as the US deleveraging process now being well advanced, substantial progress in the competitiveness of the European peripheral countries and a reduction in the ‘imbalances’ in emerging markets. It also says there has been a more constructive response from policymakers – including Abenomics – which the investment manager believes is still on track.
Valentijn van Nieuwenhuijzen, head of multi-asset, ING IM, says: “The situation is looking ever more positive, and the level of uncertainty in Q2 this year is down compared to the first three months of this year. Industrial orders, growing M&A activity and improving corporate and consumer confidence suggest upside potential, and employment conditions in the developed world have reached a post crisis high. For this reason, we remain bullish about the future and are overweight in equities, real estate, credit and commodities. However, risks remain and investors need to ensure that they keep a close eye on these.”
Key risks highlighted by ING IM are emerging market contagion, deflation in EMU and near term wage pressures in the US and UK. Evidence of the necessary reforms in emerging markets remains scarce, although hope of change has been fuelled by the recent election results in India.
The investment manager says the main risk is in China. Although the country’s growth seems to have stabilised – driven by better export growth to developed markets and some modest policy stimulus, the correction in its real estate sector has been damaging. Also, expansion of its credit sector continues to be much faster than its nominal GDP growth.
ING IM says that investor sentiment towards equities has fallen from being over optimistic to more neutral levels. However, it believes that equities still offer investors a number of attractive opportunities.
Patrick Moonen, senior equity strategist, ING IM, says: “The fundamentals for equities are strong. Trailing earnings are up 6.3 per cent year-on-year and dividends have increased by 8.6 per cent. Global monetary policy remains loose and corporates are in strong financial health, evidenced by global M&A activity being up 75 per cent during the first five months of this year compared to the same period in 2013.”
ING IM argues that equities offer attractive relative valuations, and that there is room for dividend growth.
In terms of where it is overweight in equities, the investment manager prefers Europe to the US. It says that there is absolute change in earnings growth in Europe, and that the discount to the US can diminish. It also says that recent spread reductions in European peripheral bonds have helped these countries equities.
ING IM also remains overweight in Japanese equities claiming that economic and earnings surprises turned positive, profitability has improved and investor expectations regarding Abenomics fell to low levels creating room for an upside surprise. On top of that, it believes Japanese equities currently have attractive valuations.
Finally ING IM says that cyclical sector exposure will start to dominate the search for yield theme once the economic and earnings recovery gains further traction.
