Venezuela, Amongst the Main Options in EdRAM’s Emerging Debt Strategy

  |   For  |  0 Comentarios

Venezuela, entre las principales apuestas de la estrategia de deuda emergente de EdRAM
Jean Jacques Durand, Senior Manager for EdRAM’s Emerging Fixed Income strategy / Courtesy Photo. Venezuela, Amongst the Main Options in EdRAM’s Emerging Debt Strategy

Jean-Jacques Durand, Senior Manager of the Emerging Fixed Income strategy at Edmond de Rothschild Asset Management (EdRAM), is firmly committed to Venezuelan fixed income assets as he considers that the default risk is below 50% and that it has great upside. A few months ago, Venezuela, which currently represents the largest position in their portfolio, had unfavorable technical factors which, during the summer, prompted partial profit taking for an asset in which the portfolio manager had already invested previously, and to which he returned in early 2014. After the fall of oil prices during the month of December, Durand has decided to strengthen his commitment to this country once again.

“Oil risk is high but Venezuela’s upside potential is huge,” says Durand, who explains that, “six months ago I would have thought that the worst scenario for Venezuela’s sovereign debt would be a sharp drop in oil prices, if this was produced by a fall in demand. The highest risk was a brutal fall of the development of Chinese economy, but the decline in prices has been due to supply and the OPEC’s decision not to intervene.”

The manager is confident that Venezuela will not need a restructuring of its debt or reach a default situation, which 85% of the market expects. While considering that the country has been very poorly managed, he thinks it has a good chance of readjustment, which would enable it to continue repaying its debt. “The default risk is below 50%. Even though currently the situation is difficult because social spending is very high, there are elections later this year, and the price of oil is very low, if a default were to occur it would be a political decision. The country has already overcome similar situations experienced in previous crises. It has never defaulted. “With a ratio of external debt to GDP below 20%, and most of its debt held by local investors, Venezuela has a relatively strong position to negotiate with its creditors.

Durand, who has spent the last four years in EdRAM after a long career as an emerging market’s fixed income trader in investment banks in New York and London, confesses that flexibility is required in order to choose the adequate risk and to invest the portfolio in the appropriate assets. “During those periods when the conviction is not as attractive, you have to be able to lower the portfolio’s overall exposure,” he says. When he took over management of the fund in 2012, he had to decide whether he wished to adopt either a more cautious, or a more risky approach as his overall investment philosophy. In his strategy’s investment decisions, the macro situation weighs as much as technical factors (flows, valuation, momentum), which may lead to take positions in assets that are unattractive if we just look at macro data such as the ratio of debt to GDP of the issuing country, but have very favorable fund flows or very attractive valuations. Thus, this strategy’s portfolio has a very distinct composition compared to its peers.

Such is the case of Russia, a market with very negative macro fundamentals. The political crisis and international sanctions imposed on the country have impacted the economy and the Russian Debt market, causing the consensus recommendation to drop from overweight to outright underweight. The price of bonds reflects a situation that is four or five levels below its credit rating, due to lack of investor confidence. According to Durand, “despite the crisis, its level of public debt to GDP is below 15%, external debt is virtually nonexistent, only 3% of GDP, and its ability to repay is very strong”. Currently, despite its fundamentals, which in the past prompted the manager to stay out of this country, the strategy holds a strong position in Russia.

Egypt, where Durand began building a position during the crisis “because when everyone sells there are opportunities”, is yet another example to illustrate that many times the portfolio composition is different from most of the other strategies within its category. In Mexico’s case, however, the momentum and valuation have caused the strategy to exclude it since 2012, when he disposed of an important position with significant gains, even though it shows a positive macro fundamental analysis.

Market flows greatly condition performance. Argentina, with a significant technical specific risk in 2013, was at that particular time the biggest position within the strategy. “There was a consensus recommendation to clearly underweight Argentinian sovereign debt, and us a result that the marginal seller had already exited. The only possibility remaining was for it to climb, and it did. The debt stock changed hands, leaving that of investors who cannot tolerate risk to local or medium long term investors,” added Durand.

Their positions in Belize are another sign of the management style of this strategy, in which the size of the country or its weight in the index are irrelevant. In 2012-13, elections were held in the country, debt was restructured, bonds fell dramatically, and there was very little liquidity, but there was value. “The macro analysis showed that debt was below 90% of GDP, the last government had not performed badly. It was a question of predicting, before the elections, what was the likelihood that the candidate who wanted to restructure debt would win the elections, and upon election, how would it handle restructuring (fast or slow, friendly or not). Seeing the price at which it was trading, profits were assured, regardless of who won power. In order to build the position, we began taking positions in 2012, further increasing them in 2013.”

This strategy, which may invest either in sovereign and quasi sovereign debt, as well as in corporate bonds, also takes advantage of opportunities in hard currency and in local currency debt. The strategy currently does nor hold local currency bonds because Durand expected some adjustment after the commodity boom. “We have something on the radar, but we have not entered as yet. We currently offer a strategy which is more focused on hard currency debt than in local currency debt”, he concludes.

India’s Prospects Brighter as Modi Gets Serious about Reforms

  |   For  |  0 Comentarios

El impulso reformista de Modi mejora las expectativas sobre la India
Photo: Dennis Harvis. India’s Prospects Brighter as Modi Gets Serious about Reforms

India offers many investment opportunities but is often stymied by its perceived hostile business climate. Since taking office in May last year ending ten years of a Congress-led government, Prime Minister Narendra Modi has demonstrated that he is eager to revive India’s economy, which has been in the doldrums suffering from a large current account deficit, spiralling inflation, poor infrastructure, as well as having unfriendly business laws and regulatory environment.

While the reforms introduced have so far been incremental, Modi has now promised “unlimited” economic reforms. Recently, the PM opted to push through reforms via ‘ordinances’ – a temporary executive order while parliament is in recess. Six weeks after parliament reconvenes, an ordinance must be approved by parliament or be reissued. We think this could be a game changer for India as Modi is showing he means business and will not be deterred by parliamentary obstruction.

Key reforms include:

  1. Insurance: Raising the foreign investment limit in insurance to 49% from 26%. This could potentially attract up to US$ 7-8 billion from overseas investors, providing a major boost to the industry.
  2. Land acquisition: Making it easier to acquire land for projects such as power,defence, industrial corridors, social infrastructure and housing for the poor. These projects no longer require consent of 80% of landowners during acquisition.
  3. Coal mining auction process: The repromulgation of the ordinance on coal will facilitate e-auction of coal blocks for private companies and allot mines directly to the state. This removes a big overhang for the sector and will boost coal production.
  4. Auction of minerals: All minerals other than coal will be allocated through auctions instead of an allotment basis. This will aid transfer of leases and allow a bigger scale of operations for mining companies and attract global majors.

In our view, India is one of the most positive markets in Asia. From a macroeconomic perspective there are reasons to be cheerful. GDP is forecasted to grow at a respectable 6.4% this year, while inflation appears to be under control, with the CPI remaining within the RBI’s target of 6% retail inflation by January 2016. Additionally, the manufacturing sector has been strengthening over recent months. While this more optimistic view for India is reflected in stock prices, following the recent market correction Indian equities appear to be reasonably valued now relative to historical valuations.

In the short term, lower commodity prices should be positive for corporate earnings. Lower oil prices would significantly benefit India as an oil importing country; resulting in more savings for consumers, reducing imports, improving the fiscal deficit and increasing foreign exchange reserves. Longer term, progress on reforms could provide a boost to equity markets and support the already positive macroeconomic investment case for India. Similar to many other countries within Asia, demographics, relative fiscal strength and a higher rate of growth should ensure India’s attractiveness to investors.

The Henderson Horizon Asian Growth Fund remains overweight India as we believe our investments in selected financial, consumer, pharmaceutical and IT services companies can continue to generate significant profit growth and superior returns over the next few years. Clearly the risk is that the economic reforms stall but the companies that we hold have delivered impressive returns even in a weaker political environment. Our current favoured holdings include HDFC and affiliate HDFC Bank, Tata Motors, fast moving consumer goods manufacturer Dabur, and software business, Tech Mahindra. We have also initiated a position in Lupin. The pharmaceutical has broad geographic exposure and a strong pipeline, and is also one of the fastest growing major generics companies in the key US market.

Andrew Gillan and Sat Duhra are Portfolio Managers of the Asia ex Japan Equities team at Henderson Global Investors. Andrew Gillian will be speaking in Miami Beach in the investor’s brunch, which will precede the II Funds Society Golf Tournament, on March 13th, 2015. If you are a professional investor and would like to register for this event, please contact info@fundssociety.com

Investec: Japan Receives Industrial Output Boost

  |   For  |  0 Comentarios

Japón recibe un impulso de los datos de producción industrial
CC-BY-SA-2.0, FlickrPhoto: OTA Photos. Investec: Japan Receives Industrial Output Boost

Japan’s industrial output edged higher in December, suggesting the world’s third-largest economy may be turning the corner after a recession brought on by a hefty sales tax hike. Data released last week showed manufacturing production increased by 0.3 per cent in December from a year earlier and by one per cent from the month before.

But inflation slowed to 2.5% from a year earlier, compared with 2.7% in November.

Tackling deflation

Prime Minister Shinzo Abe has made pushing prices higher the main focus of economic policies aimed at ending years of deflation that have discouraged corporate investment and hobbled growth. Japan returned to recession last year, shrinking in both the second and third quarters of 2014. The surprise slump prompted Mr Abe to call a snap election to renew his economic policy mandate, a poll that he won in December.

Now it seems the country’s mighty industrial base could be returning to health.

Flag of Japan

The Ministry of Economy, Trade and Industry said that, on top of the rise in production, there was also a 1.1% rise in shipments of goods compared with November and a 0.4% increase compared with a year earlier.

There was also a run-down in the inventories held by businesses, which shrank by 0.4% compared with November, suggesting a pick-up in demand.

The ministry said: “Industries that mainly contributed to the production increase are, first, electronic parts and devices, second, information and communication electronics equipment, and third chemicals, excluding drugs, in that order.”

It added: “Industrial production shows signs of increase at a moderate pace.”

Production forecast improves

The ministry published also its “survey of production forecast”, which it describes as “one of the useful economic indicators, which reflect changing business conditions and provide a view of where the economy is heading in the near future”.

The latest forecast found planned production this month was expected to be 6.3% higher than in December, but to be 1.8% lower in February than in this month.

The same survey in December forecast a 5.7% rise in production this month compared with December, so the expected level of output has risen by 0.6% points.

Lorenzo Parages Appointed Head of Distribution by March Gestión de Fondos

  |   For  |  0 Comentarios

March Gestión incorpora a Lorenzo Parages como director comercial para impulsar el negocio en Europa y LatAm
CC-BY-SA-2.0, Flickr. Lorenzo Parages Appointed Head of Distribution by March Gestión de Fondos

March Gestión de Fondos, one of the largest Spanish private bank-owned asset managers, named Lorenzo Parages as its head of Distribution – responsible for the promotion of MGF funds in UK, Germany, Austria, Spain, Italy, Luxembourg and Latin America.

Prior to joining the Spanish asset management company, Parages was in charge of Allfunds Bank’s investment services operations in Latin America. Formerly, Parages worked in the equity sales division of Banco Urquijo, a Spanish private bank, before pursing his career at Axa Investments as financial advisor, then in several UK firms such as BSN Capital Partners, BlueCrest Capital Management and CMD.

March Gestión de Fondos CEO Jose Luis Jimenez said Parages would help maintain the rapid growth the firm has seen in Spain and overseas since the beginning of the financial crisis, namely a fourfold increase in asset under management since 2008.

He also commented: “Thanks to strong performance, we see continuing support for our range of global equity and bond products not only in Spain but also in Italy and increasingly in Latin America. With Germany being particularly supportive of investment in family business focused funds, we see potential for strong growth there too. In the UK, we are working towards establishing a more permanent base and so Lorenzo´s experience in London will prove particularly helpful.”

Fear of the Foreign

  |   For  |  0 Comentarios

Buenas noticias para los mercados emergentes
CC-BY-SA-2.0, FlickrPhoto: Honest Reporting. Fear of the Foreign

Investors are on edge. We’re barely into the New Year and markets have been left shaken by the Swiss franc’s biggest ever one-day move; an election win for a populist party that’s demanding to renegotiate Greece’s relationship with the European Union; more evidence of a slowdown in China; and worries that cheap oil reflects weak global demand rather than a turf war between producers. Against this uncertain backdrop investors are looking again to central bankers for coordinated action, yet policymakers look set to move in opposite directions.

Stock pickers hoping this year will herald a painless transition back to a world in which central bankers and liquidity play reduced roles in determining investment returns will most likely be disappointed. All this uncertainty is making it harder for the US Federal Reserve to decide when best to raise interest rates in the first step of so-called monetary policy ‘normalisation’, even as Europe and Japan remain committed to further stimulus.

More recently emerging markets have suffered. Within six months what had been a narrative of slow recovery has turned once again into an exercise in spotting the weakest link. Like predators isolating the weakest member of the herd, short-sellers are already said to be rounding on the currencies, bonds and equities of selected emerging markets.

Many of the arguments that sustain the critics have been around for a while: a rising dollar makes assets in ‘riskier’ parts of the world less attractive to international investors; countries that rely on foreign capital to plug gaps in current account deficits will come under pressure; higher US interest rates force emerging economies to follow suit despite sluggish growth.

All of which is true, to a degree. But emerging economies are still growing faster than most developed ones and will do so for many years to come; emerging economies are in better shape today because they began reducing current account deficits after the ‘taper tantrum’ of 2013, when the suggestion of an end to Fed stimulus policies caused a panic; and emerging markets hiked interest rates following the taper tantrum and so, with the collapse of oil prices driving deflationary pressures, actually have room to cut. At the country level, most emerging countries are well- positioned to handle the latest tempest.

Yet, now there’s a new concern – the level of corporate debt denominated in foreign currencies. The argument goes like this: ever since the global financial crisis, emerging market companies have gorged on cheap debt, especially dollar debt. So with the dollar (and now the Swiss franc) surging higher, corporate borrowers face ever more expensive debt repayments, even as revenues slow and show no sign of imminent recovery.

The numbers certainly look scary. From 2009 until last year, dollar- denominated borrowing by the private sector in the emerging markets increased more than 100 per cent, or by more than $1 trillion. With memories of the global financial crisis still fresh for many people, it is only right that the risks of excessive debt shouldn’t be lightly dismissed.

However, these numbers need to be reappraised within the proper context. While some economies may still be ‘emerging’ in terms of governance and market liberalisation, they now rank in size with the biggest. The obvious example is China which, by one measure, overtook the United States last year as the world’s largest economy.

All emerging markets grew rapidly over the past two decades and once the size of these economies is taken into consideration, a very different picture emerges. In fact, external emerging market debt as a percentage of gross domestic product (GDP) has been remarkably stable – around 40 per cent – since 1995. Meanwhile, external emerging market debt (as a percentage of GDP) that’s attributable to the private sector has been almost flat over the same period and remains well under 10 per cent.

That’s not to say it isn’t an issue. Debt levels – the total level of all borrowing – need to be carefully monitored. Let’s not forget that the lion’s share of debt in emerging markets is still denominated in local currencies and there has been an expansion of all debt. But we don’t think that existing levels of foreign debt specifically represent a systemic risk.

Another reason for our view is because a lot of this foreign currency debt is linked to borrowing by commodities companies, especially those in the oil and gas sector. Sharp falls in commodity prices are a problem, but it is also an industry in which dollar borrowing is matched by dollar revenues, so the danger of a currency mismatch of the type we saw in the 1997/98 Asian crisis is greatly reduced.

Of course, high-yield Chinese property bonds are now in the spotlight with Shenzhen-based Kaisa Group Holdings having missed a coupon payment and its creditors scrambling to protect their interests. Chinese companies have become some of the biggest issuers of foreign currency bonds as they sought to sidestep credit curbs at home. But investors still recognise that, on this occasion, the problems are company-specific and panic hasn’t spread to the larger developers. We’re still confident in the ability of the authorities to manage debt levels.

The coming year will be challenging for many markets, not just those in the developing world. However, we feel that most emerging markets are set to benefit from oil prices at current levels (although oil exporters are obviously big losers) and companies will continue to make steady progress trimming fat to operate more efficiently. Sure, investor sentiment remains poor and this won’t help with capital outflows, but with price-to-book valuations well below the five and 10-year averages we think there is plenty of value.

 

Column by Devan Kaloo, Head of Global Emerging Markets, responsible for the London based Global Emerging Markets Equity Team at Aberdeen AM

Bitcoin and Altcoin Transactions Will Shrink by More Than Half in 2015

  |   For  |  0 Comentarios

Las transacciones con bitcoin y altcoin se reducirán en más de la mitad este año
Photo: BTC Keychain. Bitcoin and Altcoin Transactions Will Shrink by More Than Half in 2015

A new report from Juniper Research has found that the value of all cryptocurrency transactions will fall sharply this year to just over $30 billion, compared with over $71 billion in 2014.

The report, ‘The Future of Cryptocurrency: Bitcoin & Altcoin Impact & Opportunities 2015-2019’ claimed that the decline was attributable to the combined impact of exchange collapses, Bitcoin theft and regulatory concerns around cryptocurrency’s role in funding dark web purchases.

According to the report, the surge in altcoin transactions in 2014 was overwhelmingly attributable to brief spikes in activity during the first quarter in Dogecoin, Litecoin and Auroracoin. By the end of the year, daily dollar values of these transactions were at less than 5% of their earlier peak.

Regulated Exchanges ‘Could Stabilize’ Bitcoin Values

However, the report argued that the introduction of licensed, regulated exchanges could lead to a stabilization in currency values and with it an increase in retail transaction adoption. It pointed out that in an unregulated marketplace, consumer confidence had been eroded by the demise of the Mt Gox exchange in February 2014 and the recent theft of nearly 19,000 Bitcoins from BitStamp hot wallets.

Nevertheless, despite the fact that PayPal has now begun to allow US consumers to purchase digital goods via Bitcoin, the report argues that the scale of the challenges facing Bitcoin is so great that it will struggle to gain traction beyond a tech-savvy and/or libertarian demographic.

Real Time Transaction Settlement Opportunity

Instead, it identifies a longer term role for cryptocurrency protocols in the wider payment space. According to report author Dr Windsor Holden: “It is likely that we will see the technologies behind cryptocurrency deployed in areas such as real-time transactional settlement. Ripple Labs is already focusing overwhelming on that approach and in the medium term we may see a role evolution to this end amongst other cryptocurrency players.”

Alternative Ucits Demand Reaches Record High

  |   For  |  0 Comentarios

Impulso récord a los activos de los UCITS alternativos en 2014
Photo: Allan Ajifo. Alternative Ucits Demand Reaches Record High

The alternative UCITS sector has grown strongly in 2014, increasing by 41%YoY to a total of €224.3bn, according to the latest Alceda UCITS review.

The study also highlighted that managed futures were the best performing alternative UCITS strategy, with the index gaining 14.3% while event driven strategies declined by -2.7%.

Overall, 2014 was a challenging year for active managers with the AH Global UCITS Index which encompasses a total of 498 funds, returning only 1.3% in 2014, compared to the almost 6% gains seen in 2013.

Michael Sanders, CEO and chairman of the Board at Alceda Fund Management S.A., said: “These results show the ongoing attractiveness and demand for alternative UCITS strategies globally with investors increasing allocations and managers, in particular in the US, choosing UCITS to target European investors.

“In addition, the recent implementation of the AIFM Directive has resulted in a greater focus on UCITS with managers looking to build sustainable distribution strategies for their products.”

The Golden Rules of Multi Asset Investing

  |   For  |  0 Comentarios

Las reglas de oro para invertir en multiactivos
CC-BY-SA-2.0, FlickrPhoto: Eneas de Troya. The Golden Rules of Multi Asset Investing

Underlying momentum in global growth moved to its best pace in four years during the second half of last year. Moreover, labour market dynamics, income trends and falling oil prices and interest rates bode well for further strengthening in the global cycle. Nevertheless, markets have been edge in recent months and volatility has started to trend higher after the Summer of 2014. Doubts about central bank behaviour, rising deflation risks, the economic and geo-political fall-out from oil price declines and renewed fears over Grexit have clearly weighing on sentiment and influencing investor behaviour.

Investors need to weigh these fundamental and behavioural cross-currents. The complex ecology of markets and the continuous mutual influencing of all components in the system makes it very hard to assess what the future direction of the market will be. Therefore, it is important to follow some principles to navigate the portfolio returns through the rough twists and turns of financial markets. Those are the 6 golden rules in ING IM´s multi asset investment approach:

1. Understand where you are

The environment around us is complex, not automatically reverting to an unobserved “equilibrium” and constantly changing. So, study the functioning of the ecology you operate in, map the players around you, understand how they interact. Key in this is to know what you don’t know. Be aware of the difference between uncertainty and risk, note the obvious limitations of the efficient market hypothesis due to heterogeneity of market players, bounded rationality and occasional irrationality, limits to arbitrage and the persistence of market “anomalies” and observed falsification of normally distributed returns.

This awareness helps to focus on robustness, both in the area of data research and portfolio construction. Balance portfolio exposures well across your opportunity set and between “safe” and “return” asset classes. While doing this always keep in mind not to under-estimate risk and not to over-estimate diversification benefits. Also, always expect the unexpected.

2. Expand your horizon

Continue to learn about the world you operate in and develop innovative research to explore the environment in the best possible way. This means not only understanding the underlying fundamentals well, but also developing expertise on the emotions and behaviour of the investors around you.

To do this effectively some creativity is needed. Information need to be found and utilized in an innovative way. On top of that the resulting data analysis needs to be rigorous and consistent to eliminate behaviour pitfalls, while also allowing investor skill to add insight on the unquantifiable like regime shifts at Central Banks or (geo) political shocks.

It also translated into the breath of your investment universe and the effective use of the diversity in investment opportunities, both across asset classes and through time.

3. Adapt to change

Allow yourself, said ING IM team, to be active, but make sure accountability is always in place and incentives an open minded way of thinking about the economy or markets. Therefore, change your opinion once the facts change or the market ecology has adapted. And while risk premiums are shifting during the process, take risk when opportunities are high and hide when uncertainty is not well rewarded.

4. Team up

Do not think you can do all of the above alone. Listen well to your stakeholders (clients, regulators, team members, other partners), determine the right risk tolerance and aim for a prudent investment solution. Utilize all skill in your investment team and stimulate cooperation and learning amongst team members against a backdrop of clear goals, responsibility and accountability. Play as a team.

5. Iron discipline

Make sure consistency of your investment decision is safeguarded well. Work with a strong investment process that works in different investment climates. Use strategist and portfolio manager skill and experience to construct a resilient investment toolkit. Have challenging discussion on motivations to deviate from guidance from the toolkit. Aim to have skin-in-the-game for decision takers.

6. Simplicity

Against the backdrop of the complex system of markets, keep it as simple as possible without damaging effectiveness. Identify clearly what the sources of returns are and where your own strengths lie in exploiting them. Value consistency over complexity and monitor liquidity, transparency and costs at all times aware.

State Street Corporation Signs United Nations Global Compact

  |   For  |  0 Comentarios

State Street Corporation firma el Pacto Mundial de Naciones Unidas
CC-BY-SA-2.0, FlickrPhoto: www.pactomundial.org. State Street Corporation Signs United Nations Global Compact

State Street Corporation announced it has become a signatory to the United Nations Global Compact (UNGC), the world’s largest corporate citizenship initiative. The UNGC is based on 10 universal principles in the areas of human rights, labor, the environment and anti-corruption, which closely align with State Street’s corporate responsibility focus.

The UNGC initiative was officially launched in 2000 to encourage businesses worldwide to adopt sustainable and socially responsible policies, and to report on their implementation. State Street joins more than 12,000 other signatories from companies, governments, labor, and civil society organizations in approximately 145 countries.

“Our membership with the UNGC furthers our focus on these issues and emphasizes the importance of them to our clients, employees, shareholders and the communities where we live and work. We are pleased to become an official member of the UNGC initiative, as its 10 universal principles in the areas of human rights, labor, the environment and anti-corruption closely align with our own values,” said Alison Quirk, executive vice president and chief human resources and citizenship officer at State Street. “Our membership with the UNGC furthers our focus on these issues and emphasizes the importance of them to our clients, employees, shareholders and the communities where we live and work.”

By signing the compact, State Street confirms its support of the initiative’s 10 principles and its intent to advance those principles within its organization.


 

Will 2015 Finally Be the Year When the Global Economy Returns to Normal?

  |   For  |  0 Comentarios

¿Será 2015 finalmente el año en que la economía mundial vuelva a la normalidad?
Photo: Gabriela Da Costa. Will 2015 Finally Be the Year When the Global Economy Returns to Normal?

Throughout the global economic expansion that is now stretching into its sixth year, we have experienced periods of accelerating growth followed by brief pauses or setbacks. Even with extraordinary monetary policy stimulus and ultra-low interest rates, the world economy has struggled to maintain an above-trend rate of growth. As a result, excess capacity remains. Little wonder that global inflation continues to surprise to the downside. “In other words, this expansion has been anything but normal”,  point out MFS experts, Robert Spector, Institutional portfolio manager, Sanjay Natarajan, Institutional Equity portfolio manager, and Robert M. Hall, Institutional Fixed Income portfolio manager.

Will 2015 finally be the year when the global economy returns to normal?, asked. After all, consensus growth estimates reported by Bloomberg show an accelerating pace this year versus last year. And these forecasts probably underestimate the constructive impact of the sharp plunge in energy prices, which is likely a net positive for the global expansion.

“In our view, a normal economy is characterized by being relatively synchronized across regions, maintaining a self-sustaining growth rate at or above its potential without hyper- accommodative monetary conditions and having a functioning credit system so that easy central bank policies can work effectively. Let’s look at each of these three characteristics in turn”, they explain.

Synchronized across regions

The global economy remains unsynchronized. The United States is the undisputed growth leader among the major economies, with third-quarter real GDP growth hitting 5% at an annual rate, the labor market improving at an impressive clip and prospects for consumer spending looking solid. Energy-related capital spending will likely take a hit from lower oil prices, yet overall we expect US growth to be around 3% in 2015.

By contrast, European growth may struggle to hit 1%, given ongoing deleveraging and the threat of deflation. Although Japan could receive a boost from lower energy prices and a weaker yen, real wages may continue to stagnate, and structural reforms remain a headwind until they become a reality. Emerging economies in general face a muted global trade cycle and structural issues related to productivity. The bottom line is that the global economy will continue to grow in 2015, but without the reinforcing vigor of a synchronized expansion.

Self-sustaining growth at or above potential rate

Given these divergent growth trends, it will be difficult for the world economy to grow above the long-run potential rate on a sustained basis. “As a result, we expect global monetary conditions to remain super easy in 2015. Though the US Federal Reserve (Fed) has ended quantitative easing and is guiding the market toward a midyear rate tightening cycle, the timing of the first hike could be pushed out if inflation keeps undershooting expectations on downward pressure from crude oil prices or if US labor market improvements fail to generate wage gains”, says MFS.

Functioning credit system

Blockages in credit continue to get in the way of monetary stimulus, as money multipliers and the velocity of money are still falling. To be sure, deleveraging has reached an advanced stage in the United States, yet debt levels remain high by historical standards. Globally, there has actually been no net deleveraging since the financial crisis, owing to the debt buildup among European governments and emerging markets (EM). “Without the powerful accelerant of credit expansion, easy monetary policy can provide a buffer against deflation pressures and boost asset prices but cannot be the savior of global growth as in normal cycles”, concludes the MFS analysis.

The bottom line is that growth in 2015 may surpass last year’s tally, thanks mainly to the strength of the US expansion and the sharp drop in oil prices. However, we expect the recovery to remain far from normal, so the environment of low inflation and long-term sovereign yields should persist. “That would be good for equity prices and the US dollar. As long as the global economy avoids recession, which is our base case, global equities should outperform global government bonds in 2015”, they explain.