SEATTLE--(EON: Enhanced Online News)--Russell Investments today released its latest quarterly outlook for the global capital markets, predicting modest gains for equity markets and higher bond yields in 2014 as the world’s major economies continue to grow. The fourth-quarter Strategists’ Outlook & Barometer offers in-depth analysis of key economic and market indicators from Russell’s global team of investment strategists, whose insights help to guide the firm’s multi-asset portfolios and services.
“The eleventh-hour deal we have just witnessed is just another round of Congressional ‘kick the can,’”
In the report, Russell’s strategists note that politicians and policy likely remain the biggest threats to economic recovery, and they point to U.S. monetary policy and political pressures worldwide that could impact the 2014 performance of various asset classes.
“As investment strategists we are normally presented with a difficult task of forecasting capital markets, but this task seems far easier than the recent near impossible one of forecasting politicians,” said Doug Gordon, senior investment strategist for North America at Russell. “Looking at the path ahead we believe additional volatility may continue, but this could be leveraged as an opportunity to increase tactical equity positions, such as within multi-asset portfolios.”
Russell’s strategists continue to favor equities over fixed income, and they remain moderately positive on equity markets globally. Looking regionally, the strategists continue to prefer European equities over U.S. equities, and they believe emerging market equities look increasingly more positive, possibly offering double-digit earnings growth in 2014.
“As we look toward 2014 we’re forecasting synchronized growth across the U.S., Japan and Europe for the first time since 2010,” said Andrew Pease, global head of investment strategy at Russell. “We also see a strengthening low-inflation recovery that favors equities over bonds, despite relatively full equity market valuations.”
QE has minimal impact on portfolio guidance
Regarding Quantitative Easing (QE), it has had little influence on the portfolio weighting guidance suggested by Russell’s investment strategists. When the winding down of QE eventually happens, they expect it to trigger some market volatility; however, they do not believe the U.S. Federal Reserve has significantly distorted asset prices. In fact, they see little evidence that QE has pushed asset prices beyond levels that can be justified by the current combination of stable economic growth, low inflation and moderate corporate earnings growth.
No silver economic lining for U.S. if fiscal tightening continues in 2014
Russell’s strategists underscore that though the U.S. economy is currently in the midst of a reasonably sturdy expansion, policy mistakes remain the biggest obstacles.
“The eleventh-hour deal we have just witnessed is just another round of Congressional ‘kick the can,’” said Mike Dueker, chief economist at Russell Investments.
The impact of fiscal tightening that kicked off 2013 means that real Gross Domestic Product (GDP) growth will likely end up at 1.6% this year. The U.S. economy needs a solid 2014 to ratify this year’s equity market gains, according to the strategists. Without significant fiscal tightening, the U.S. could possibly achieve nearly 3% growth in 2014, with job gains averaging 200,000 per month over the next 24 months.
Other highlights of their 2014 U.S. outlook include:
- By the end of Q3 2014, the 10-year Treasury should yield 3.2%.
- Forecasted year-on-year real GDP growth of 2.9% for 2014.
Resist complacency about the recession-free Eurozone
While Eurozone equities still appear relatively cheap and capital continues to flow amid the easy monetary policy of the European Central Bank (ECB), Russell’s strategists caution that vigilance is still warranted. Since the Eurozone’s key long-term problems have not been solved, these positives only marginally outweigh the negatives.
The strategists believe risks to the Eurozone are also political and fiscal. German Chancellor Angela Merkel’s reelection, they suggest, does not help the peripheral economies of Greece and Portugal, which still need support and debt forgiveness but are unlikely to get it under her leadership. Issues related to setting up a European banking union are even more worrisome, and could erase the current optimism if the implementation is mismanaged.
All things considered, the Eurozone did leave recession in the third quarter of 2013, and the strategists expect economic growth to remain positive, but lackluster, in 2014 at between 0.5% and 1%.
Asia-Pacific optimism, particularly for Japan
The investment climate continue to change for the better in Japan, the strategists believe, as newly elected Prime Minister Shinzo Abe appears successful in turning the economy around. Though stimulus and spending challenges remain, real GDP is at 4%, and monetary growth is at 3% year-on-year at the end of the third quarter, after bottoming near zero at the top of 2013. Elsewhere, Russell strategists say that China’s economic rebalancing trick is performing as it should, and the Asia-Pacific region as a whole appears poised to respond positively to acceleration in either U.S. or European growth in 2014.
Russell’s strategists examine key global asset class pairings to determine which in each pair currently signals better return prospects.
“The impact of the political fireworks in the United States and geopolitical risks have meant buying opportunities in the U.S. equity markets for those nimble enough to capitalize on the resulting volatility, though our recommendation to the less agile and more risk averse remains equity overweight,” said Gordon. “Though we’re considerably less bullish long-term than earlier in the year, we still prefer U.S. equities over fixed income. Improving growth prospects reinforce our strategy to use market pullbacks as buying opportunities.”
For more information, please see the “Strategists’ Outlook and Barometer”.
About Russell Investments
Russell Investments (Russell) is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell stands with institutional investors, financial advisors and individuals working with their advisors — using the firm's core capabilities that extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes to help each achieve their desired investment outcomes.
Russell has more than $246 billion* in assets under management (as of 9/30/2013) and works with over 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has $2.4 trillion in assets under advisement (as of 6/30/2013). It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell traded more than $1.4 trillion in 2012 through its implementation services business. Russell also calculates approximately 700,000 benchmarks daily covering 98% of the investable market globally, which includes more than 80 countries and more than 10,000 securities. Approximately $4.1 trillion in assets are benchmarked to the Russell Indexes. (*Includes more than $70 billion of derivative overlay assets under management not included prior to June 30, 2013).
Headquartered in Seattle, Washington, Russell operates globally, including through its offices in Seattle, New York, London, Paris, Amsterdam, Sydney, Melbourne, Auckland, Singapore, Seoul, Tokyo, Toronto, Chicago, San Diego, Milwaukee and Edinburgh. For more information about how Russell helps to improve financial security for people, visit www.russell.com or follow @Russell_News.
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.
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Russell Investment Group, a Washington, USA corporation, operates through subsidiaries worldwide including Russell Investments. Russell Investment Group is a subsidiary of The Northwestern Mutual Life Insurance Company.