The recovery is touching the vast majority of the world according to JPMAM’s latest data, with 85% of countries in expansionary mode for the first three months of 2014, having a positive PMI of 50 or more.
Commenting on JPMAM’s latest ‘guide to the markets’ Flanders, its chief strategist for the UK and Europe, said these data offer further support for the asset manager’s optimistic outlook. With requisite allowances made for volatility, expectations of a moderate, synchronized global recovery are on track, Flanders noted.
Flanders said the real question investors should be asking themselves now is not whether we have a global economic recovery, but by how much it is going to recover.
In Flanders’ view investors around the world now largely accept the Fed’s claim that ‘tapering is not tightening’ and this has been a factor in US treasuries yields remaining stable since it began.
However while the Fed is always going to have a major impact on global liquidity, Flanders said the other three key central banks' impact should not be underestimated. Of these, only the Bank of England is expected to tighten policy in the near term, in line with the Fed.
The European Central Bank and Bank of Japan are likely to continue either at current levels or carry out further loosening for the foreseeable future and this will ensure ‘ample global liquidity for a considerable time’, in Flanders’ view.
While equity markets in Europe and the US are not likely to crumble anytime soon, they won’t pay as well as in 2012 – 2013 when there were many undervalued stocks due to investor nervousness on the global economy. Therefore good stock picking based on earnings prospects and margins is more important under the conditions in place now than in the past two years, Flanders said.
For fixed income investors the situation is ‘equally nuanced’ in Flanders’ opinion. Provided the global recovery continues, longer-dated bond yields are likely to rise in the UK and the US causing losses for holders. The key here, Flanders said, will be watching economic fundamentals as rate setters on both sides of the Atlantic have been clear that decisions will be tied to economic data such as employment numbers.
