Economic divergences are likely to create material variances in monetary policy in 2015 and beyond. Overall our economists expect a slight pickup in global growth to around 3.1% in 2015, up from 2.7% in 2014, but also expect the growth gap between developed and emerging economies to be at its lowest level since the start of the millennium. Key downside risks in the year ahead center, in our view, on China’s domestic economy, continued underperformance in the euro area, potential geopolitical shocks and the weakening support for global economic integration. Key upside risks would most likely center on the boost to consumers from lower commodity prices and the impacts of loose monetary policies, especially in advanced economies.
Across 2014 our asset allocation framework recommended an overweight position in equities but, while equities outperformed other asset classes, the margin was not as comfortable as expected, especially relative to government bonds. In the year ahead, our strategists still view equities as the asset class outperformer, buoyed by solid corporate earnings growth (we forecast 9% globally), highly accommodative monetary policy in advanced economies and valuations which look supportive by historic standards. After the stronger than expected performance in 2014, we forecast core government bond returns to be weak with higher yields forecast across the board. The expected back-up in benchmark rates creates a headwind for credit total returns, although expected QE from the ECB should support European credit over the US. In early December we were forecasting positive returns on major commodities through to end-2015 but below historical average returns. The continued precipitous fall in the oil price in the past year 6 weeks has taken the price well below what we see as an equilibrium level but the structural backdrop within the energy industry suggests that pressure may remain near term.
To provide context to our asset class predictions, we examine in detail in the first section of this report the issue of central bank policy and then follow this with analysis on inflation, energy prices and the position of China in the global economy. All four of these topics were of central concern to investors in our theme survey. We then examine the outlook for the globalization of trade and financial flows as well as the risk of exogenous shocks in a world where geopolitical risks have arguably risen to levels not seen since the fall of the Berlin Wall in 1989.
Several of our leading Equity analysts review three themes at the end of this report that have direct downstream implications for equity securities. These themes are e-commerce, where we examine the growth of the online retail sector, especially in emerging markets; battery storage, where we assess the market opportunity and also what this opportunity means for technology companies, utilities and commodities; and the impact of Fed policy on US banks.
