{"id":327377,"date":"2014-01-15T00:00:00","date_gmt":"2014-01-15T05:00:00","guid":{"rendered":"https:\/\/www.investmentexecutive.com\/uncategorized\/u-s-china-lead-the-way\/"},"modified":"2019-11-06T16:27:57","modified_gmt":"2019-11-06T21:27:57","slug":"u-s-china-lead-the-way","status":"publish","type":"post","link":"https:\/\/www.investmentexecutive.com\/in-depth_\/special-reports\/u-s-china-lead-the-way\/","title":{"rendered":"U.S., China lead the way"},"content":{"rendered":"
THE GLOBAL ECONOMIC OUTLOOK for this year is<\/em> mostly positive, with many economists calling for continued growth and less uncertainty.<\/p>\n Although there is wide agreement that investment returns in equities markets are unlikely to match the strong surges of last year, portfolio managers say, total returns of 7%-10% are likely. Many regarded last year as a catch-up year, with long-depressed stocks, particularly in Europe and Japan, rebounding. U.S. equities also did well. It was only emerging markets and resources-producing countries such as Canada that were down or less buoyant.<\/p>\n The key to maintaining solid returns this year is continued acceleration in global growth – to 3.2%-3.5%, compared with the estimated 3% last year. Achieving this level of growth will depend on the U.S. and China.<\/p>\n “This is a U.S.- and China-led recovery,” says Drummond Brodeur, vice president, portfolio management, and global investment strategist with Signature Global Advisors, a unit of CI Financial Corp.<\/em> in Toronto. “No one else matters.”<\/p>\n The U.S. and China are the world’s largest economies, and many countries depend on exports to the U.S. and China to keep their economies growing. This is so even though China’s growth rate slowed to around 7.5% last year, down from its double-digit pace in the first decade of this century. But even if China’s economic growth rate drops slightly this year, 7%-7.5% growth remains strong.<\/p>\n At the same time, China will be relying heavily on its exports, which account for about 40% of its gross domestic product (GDP). And as a large chunk of those exports are to the U.S., China will be dependent on continued economic recovery in the U.S.<\/p>\n The U.S. is not in the same boat. With its exports accounting for only about 14% of GDP, domestic demand is the U.S.’s main growth driver. That economy is expected to grow by 2.5%-3% this year, up from 2013’s estimated 1.7%.<\/p>\n The eurozone, on the hand, remains sluggish, even though it is one of the world’s largest markets. This region is expected to post positive GDP growth of 0.5%-1% this year. Although that doesn’t sound impressive, it’s a significant turnaround when compared with its estimated 0.5% decline in 2013.<\/p>\n Japan is a question mark. The Bank of Japan is aggressively printing money and the country’s government, under new prime minister Shinzo Abe, is implementing financial measures designed to promote economic growth. But a sales tax increase coming in April, to 8% from 5%, is likely to have negative impact.<\/p>\n Overall, emerging economies are expected to post stronger growth rates than those in the industrialized world, although they won’t be growing strongly.<\/p>\n However, this picture of widespread growth is not expected to be strong enough to boost the prices of commodities, which remain lacklustre and still depressing the value of many resources-based stocks.<\/p>\n Opinions among portfolio managers vary, however. Jean-Guy Desjardins, chairman, CEO and chief investment officer (CIO) with Fiera Capital Corp.<\/em> in Montreal, thinks the U.S. economy will grow by 3.5%-4%, thus contributing significantly to total global growth of 3.75%-4%. That situation would be sufficient to push up resources prices and, as a result, his portfolios are overweighted in energy and base metals.<\/p>\n Conversely, Ross Healy, chairman of Strategic Analysis Corp.<\/em> in Toronto, and Nandu Narayanan, CIO with Trident Investment Management LLC<\/em> in New York and portfolio manager of a number of funds sponsored by CI Investments Inc.<\/em>, both think the economic outlook is very bleak because of the failure of the U.S. and the eurozone to address their debt issues in a serious manner. Both these portfolio managers think that there will be another global credit crisis in the near future, although not necessarily this year.<\/p>\n If they’re right, this would be a good time to buy gold. Both Healy and Narayanan foresee gold prices moving up sharply if their negative outlook becomes more likely. Narayanan expects gold bullion to reach US$2,000 an ounce in the next few years, up from its recent US$1,200 an ounce.<\/p>\n But other portfolio managers are not interested in gold bullion. They recommend overweighting equities, particularly cyclicals (except for resources). However, opinions are divided regarding which geographical areas offer the best opportunities. Some favour the U.S.; others think that the U.S. market is fully valued and see better opportunities in Europe and Japan.<\/p>\n Most portfolio managers don’t suggest currency hedging except for exposure to the yen. (See story on page B14). The yen was down by 17.6% against the U.S. dollar (US$) in 2013 and is expected to drop further in relative value this year. The Canadian dollar (C$) also is expected to decline vs the US$. However that would enhance returns for your clients when investment gains in US$ funds are translated into C$. The euro also is expected to decline relative to the US$, but not necessarily by more than the C$.<\/p>\n The outlook for fixed-income investments is murkier. Medium- and long-term bonds have already lost value due to the rise in interest rates. Most portfolio managers and strategists expect further losses in these investments as rates continue to rise gradually. Some recommend that investors commit 5%-10% of their portfolios to high-yield bonds, arguing that with global growth more likely to become self-sustaining, the risk of defaults is relatively low. Other portfolio managers are staying with safer bonds – particularly, those of investment-grade. Narayanan, for one, prefers an overweighted position in government bonds of “safe” countries such as Canada, Australia, Norway and Sweden.<\/p>\n