This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Andreas Utermann, global chief investment officer of Allianz, gives his global outlook for 2014.
Monetary policy will be looser and last longer than the market expects due to moderate but below trend global growth, low and in some cases falling inflation and stubbornly high unemployment.
Financial repression remains the single most important challenge for capital market participants next year even with cyclical recovery and moderate economic growth prospects.
Investors should expect a continuation of the low interest rate policy from central banks because many developed countries are only beginning to tackle unsustainable levels of sovereign debt. The greatest risk in policy makers’ eyes is posed not by inflation but by deflation.
Monetary policy tightrope
Conditions for a change in the global policy mix are unlikely to be in place before 2015 at least because the fragile economic recovery is still reliant on a drip feed of monetary easing. The sudden rise in bond yields and massive sell-off in the emerging markets earlier this year confirmed just how much the markets rely on this stimulus. We are therefore assuming central banks will continue to act cautiously while the recovery is fragile.
It will take several quarters of at least at or above trend growth, coupled with rising inflation expectations and evidence that global levels of debt are starting to fall in real terms for the world’s central banks to reverse course on interest rates.
However, inflation risk would increase if central banks waited too long to apply the brakes to the monetary easing policies currently in place. We expect discussions about the precise timing for an eventual rise in interest rates to continue for the rest of 2013 and into the first quarter.
Tensions around the valuation of global currencies could also worsen further in 2014 on maintenance of ultra-loose monetary policy. The significant weakening of the yen and the US dollar, which has reached its lowest level in trade weighted terms for many years, is starting to cause significant friction within the global economic community.
Markets should be mindful, as we have warned in the past, of this turning into a full blown currency and trade war. At present, though, away from the posturing, currency movements in the past year amount to a zero sum game as, the yen excepted, they had been largely range bound.
Risk assets still offer important sources of return
In the longer term, investors looking for inflation-beating, higher returns will be forced to look to equity markets at last, with equities one of the few asset classes able to deliver the capital returns needed.
Equities are less likely to be impacted by unsustainable levels of sovereign debt and are set to benefit from a longer term recovery in the global economy – they continue to offer investors the most attractive long term returns in 2014 of any asset class in our opinion.
Companies that have the proven ability to grow their dividends in a sustainable manner across all market conditions remain at the core of my outlook for 2014. For government bonds, we are likely to see a repeat of previous years, with risk assets outperforming benchmark yields, albeit in an increasingly paranoid environment exemplified by fears of deflation and concerns about upcoming tightening.
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