Global Macro Strategy
April 21, 2015
Paul Christopher, CFA®, Head of International Strategy and Co-Head of Real Asset Strategy
Chris Haverland, CFA®, Global Asset Allocation Strategist
Analysis and outlook for the global economy
- The backdrop for global investment continues to improve but remains gradual and tenuous in certain countries.
- We are revising some of our U.S. and international forecasts for year-end 2015, while leaving intact our general view that overall progress should continue in the second half of the year.
What it may mean for investors
- Considering the gradual but uneven improvement, we reiterate our general preference for global equities over global bonds (especially developed-market bonds). We also reiterate our preference for U.S. equities, followed by developed-market, and then emerging-market equities.
Adjusting Our U.S. View: Another Cold Winter Takes a Toll
Economic Growth - Given the weaker-than-expected first-quarter growth figure for the U.S. economy, we are reducing our full-year forecast from 3.0 percent to 2.8 percent for inflation-adjusted gross domestic product (also known as real GDP). An improving labor market, higher confidence, higher wages, and sustainably low inflation, should help boost consumption as the year progresses. This, in turn, should support economic growth.
Inflation – Given the significant drop in the prices of oil and other commodities, and likelihood they will remain at lower levels throughout this year, we are reducing our annual inflation forecast from 1.4 percent to 0.7 percent. This downward revision is based on the prospective change in the 12-month Consumer Price Index.
Unemployment Rate - The unemployment rate in the U.S. has fallen in each of the past five years, and, at the same time, the pace of job creation is improving faster than we originally forecast. We expect the U.S. labor market to continue this trend for the remainder of 2015. Consequently, we are lowering our year-end forecast for the unemployment rate from 5.4 percent to 5.0 percent.
International Cross-Currents Intensify
Since the beginning of the year, we have expected modestly higher economic growth and lower inflation around the world, especially in the second half of the year. The inflation portion of that forecast remains intact. Low and falling inflation is common now in many countries and is a boon to many businesses and households in emerging economies. Falling inflation also gives policymakers the flexibility to lower rates to help stimulate growth. Twenty-three emerging-market central banks have lowered interest rates so far this year. Some of them, such as those in Poland, China, and Korea, are likely to cut rates further, in our view.
Our forecast adjustments reflect the new prospect for extended weakness in emerging markets with a balance between slower U.S. and faster European economic growth. Specifically, our new 2015 forecast for developed economies (including the U.S.) holds at 2.2 percent, while for emerging economies the rate forecast for 2015 falls from 5.1 percent to 4.4 percent. Bank lending, confidence, and spending have led the European economies to a quicker pace. By contrast, greater-than-anticipated financial strains in Brazil, Russia, and other emerging economies, have weighed on emerging economies. China’s continued housing and manufacturing slowdowns also look more significant than at the beginning of the year. When weighting these changes for the relative sizes of the developed and emerging economies, the net change lowers our global growth forecast from 3.7 percent to 3.5 percent, which is only slightly better than the 2014 global growth pace of 3.4 percent.
The main risks to our macroeconomic outlook appear to have eased somewhat but not entirely. The trajectory of economic progress is becoming more resilient but may still be vulnerable to a shock to confidence. For example, from a new Greek financial crisis that spreads, or from a Chinese financial disruption that spills over to other major markets. Likewise, an escalation in violence in the Middle East that spreads to Saudi Arabia, Egypt, or Iran could also undercut confidence, particularly if oil lanes are blocked.
The global investment environment continues to improve slowly and, at times, unevenly across countries and from quarter to quarter. The U.S. economy still leads the global recovery, but our forecast for the economies of Europe and Japan to narrow the lead somewhat remains intact. The main setback for first-quarter growth was the slow start for emerging economies. Considering the gradual but uneven improvement, we reiterate our general preference for global equities over global bonds (especially developed-market bonds) and our preference for U.S. equities, followed by developed-market, and then emerging-market equities.
Paul Christopher is the head of international strategy and the co-head of real asset strategy for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.
Mr. Christopher focuses on the international economic outlook and offers investment advice on currencies and commodities. He is frequently quoted in the national media, including The Wall Street Journal, The New York Times, Forbes, Time, Investor's Business Daily, USA Today, Bloomberg News, ABC News, NBC News, and CNBC.
Prior to joining Wells Fargo, he developed economic strategies to trade in global financial and commodity futures markets for Eclipse Capital Management. In previous positions, Mr. Christopher supplied international economic perspectives for Wells Fargo predecessor A.G. Edwards, and advised institutional clients of Istanbul-based Global Securities on the oil-based economies of the Caucasus and Central Asia. He has consulted with the governments of Hong Kong, Egypt, Russia, Kazakhstan, and the Kyrgyz Republic on monetary policy issues.
Chris Haverland is a global asset allocation strategist for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.
Mr. Haverland is responsible for thought leadership on the economy, financial markets, investment strategy, and asset allocation. He researches timely investment topics and produces market updates, special reports, white papers, podcasts, and webcasts that articulate strategies for clients that help them meet their long-term financial goals. Other responsibilities include developing capital market assumptions and strategic asset allocations, providing tactical advice, conducting asset class research, assisting in portfolio management, writing commentary for investment publications, and providing investment guidance for financial advisors and clients.
Prior to joining Wells Fargo, Mr. Haverland was a portfolio manager, corporate bond analyst and trader at Jefferson Pilot Financial (now part of Lincoln Financial) in Greensboro, North Carolina, where he managed $2.6 billion in fixed income assets. He has nearly 20 years of experience in financial services.
Mr. Haverland earned a Masters of Business Administration from Elon University and a Bachelor of Science in Business Administration from Appalachian State University. He is a CFA® charterholder and is a member of the CFA North Carolina Society. Mr. Haverland is located in Winston Salem, North Carolina.
*As of Sept. 30, 2014
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