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Russell Investments forecasts generally positive trajectory for global market

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Russell Investments has released its quarterly outlook for global capital markets, projecting continuing improvements in the US, Europe and Japan.

 
The 3rd Quarter Strategists’ Outlook and Barometer features in-depth analysis of key economic and market indicators by Russell’s team of investment strategists, who help guide Russell’s multi-asset portfolios and services.
 
In the report, Russell’s team of global strategists project steady growth in the US market over the next 24 months, forecasting the US economy has sufficient spare capacity to grow without generating inflation pressures.
 
Even after the strong upward run in global equity markets, Russell’s strategists favour equities over bonds and cash, although equities are expected to outperform bonds by a smaller margin than in the first half of 2013. Within global equities, Russell strategists prefer Europe and Japan due to slight improvements in the Eurozone, the success of ‘Abe-nomics’ in Japan, and the overall attractiveness of Japanese and European equity valuations relative to US valuations.
 
“We expect in the months ahead to see economic growth in the US remain modest but robust, Europe to emerge from recession and Japan to accelerate,” says Andrew Pease, global head of investment strategy for Russell Investments. “The gains in global equity markets and rises in bond yields mean that we head into the second half of the year with equity markets offering reasonable, but not outstanding value and with bond markets less dangerously overvalued.”
 
Conditions in emerging markets remain challenging for equities, given the strengthening of the US dollar, falling commodity prices and general geopolitical upheaval in countries from Brazil to Egypt. However, Russell’s strategists believe an export recovery and a settling of the current uncertainty around China could serve as catalysts for a rebound in the medium-term.
 
“Emerging markets offer good value and could rebound as exports recover amid stronger growth in developed economies and if EM central banks allow their currencies to depreciate against a stronger USD,” Pease says.
 
Russell’s strategists believe that US employment gains will likely average 200,000 jobs per month for the next 24 months, though they may decelerate modestly in the very near term. The first increase in the federal funds rate likely won’t take place until the fourth quarter of 2015. However, the June revision to the annualised real consumption figure, which lowered the growth rate from 2.9 per cent to 1.8 per cent, implies less momentum going into the second half of the year.
 
Another challenge, according to the strategists, will be the US Federal Reserve’s (the Fed) wind down of quantitative easing that is likely to begin in 2013, though it is the end date (and not the beginning date) that is most significant, even though the Fed is unlikely to hit their growth, inflation and Treasury yield targets this year.
 
“Many investors fear that our current economy resembles 1994 where the Fed policy tightened dramatically, leading to a sudden rise in yield rates and choking equity growth,” says Mike Dueker, chief economist for Russell Investments. “Our perspective is that the economic conditions today parallel 1984 more closely, when a bullish US economy forged the way for stable global growth. Similarly, we expect the US economy to be characterised by moderate inflation, a low recession risk and stable growth in the coming months.”
 
Russell’s strategists believe Europe will continue down a bumpy road in 2013, remaining in a tug-of-war between reflationary monetary policy and deflationary austerity. Although the European Central Bank (ECB) continues to support looser monetary policy, boosting the outlook for both consumer and industrial confidence within the Eurozone, the strategists believe growth will remain weak due to negative credit growth, high unemployment, the unlikely prospect of political reform and stagnated growth in Southern Europe.
 
Before the end of 2013, the strategists predict that Europe should finally escape recession as austerity eases and credit creation slowly unfreezes. Greek debt restructuring, Spanish banks’ weakness and uncertainty surrounding the Italian government all still present risks but these should not be insurmountable. Equity valuations in Europe are attractive relative to the rest of the world, and the strategists see more profit upside than in the US market. Their overall outlook for European equities, therefore, is a slight upgrade from underweight to neutral.
 
Russell strategists have positive growth expectations for both Japan and China. Japan has experienced strong real Gross Domestic Product (GDP) growth so far in 2013, and business conditions and industrial production are showing tentative signs of improvement. In China, real GDP growth expectations are slipping, but authorities are prioritising reform over short-term growth and constructively restructuring to address corruption and imbalances in the economy. Australia is facing a slowdown, but encouraging signs remain in housing finance.
 
Russell’s strategists also offer a look at key global asset class pairings to determine which asset class in each pair currently signals better return prospects.
 
“Perhaps one of the more interesting signals this quarter is the comparison of two relatively attractive equity asset classes: continental European equities and Japanese equities; the former facing a momentum headwind, the latter strongly supported by momentum,” says Douglas Gordon, senior investment strategist, North America. “Japanese equities have driven much of the performance in global equity portfolios in 2013, and European equities have started to become more attractive given the high valuation of US equities and some mitigation in policy and political risk. Between the two, we see a rotation toward Japanese equity, and we would continue to favour Japanese equities in our global equity basket or non-US developed equity exposure.”

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