Global growth is recovering and is projected to rise between 3.5 and 3.7 per cent this year. It is important to note that the additional growth has started coming in largely from developed markets. Emerging markets are still growing (our forecast is 5 per cent in 2015 for EM and 2.3 per cent for developed markets) but not as fast relative to the last year than developed markets.
Regarding equities, we expect much of the growth in returns to come from earnings and dividend growth. US GDP is expected to be around 3 per cent; the earnings growth is going to be about 6 to 8 per cent, with dividend growth of 2 per cent. In Europe, GDP growth is expected to be about 1.2 per cent, while earnings growth is pegged at 7 to 8 per cent and dividend growth at 3.5 per cent. Across the developed world, improved GDP growth and strong corporate earnings are the story behind higher returns.
The China slowdown has been felt in commodity-exporting countries. Since peaking in 2011, the price of a representative basket of commodities that China consumes has fallen by 30 to 40 per cent. EM countries that export commodities to China have experienced falling export revenues, falling growth and underperforming equity markets that in some cases prompted central banks to spend reserves to defend the currency. The big commodity exporters (Brazil, Chile, Colombia, Peru, Russia and South Africa) look like they will face another tough year in 2015.
Our preference is for EM manufacturing countries with competitive labour cost growth versus China, and more stable profit margins: the Czech Republic, Hungary, India, Indonesia, Mexico, Philippines, Poland, Taiwan and Thailand. Other than Mexico, this entire group and China benefit from lower oil prices, with many being larger net oil consumers than Europe. Continued political turmoil in Russia and Brazil, along with unresolved external financing vulnerabilities in countries such as South Africa and Turkey, keep us cautious on emerging markets outside of Asia. For now, we are sticking to Asia—like last year, we advise staying away from emerging economies that are dependent on commodity markets for export growth.
Therefore, oil price decline is expected to be a big growth boost for the emerging markets and it will work similarly for European economies. The decline is positive for consumers in Europe, and not just in terms of better cost structures for companies. At a macro level it will feed into energy prices and ultimately the spending capacity of individuals. We also expect lower energy prices to keep inflation moderate and thus avert the danger of a tail risk coming from that side. For the US economy, we expect the overall effect of lower oil prices to be flat to mildly positive, as capex will also decrease.
In the absence of supply discipline in the market, oil prices are expected to remain low. For many oil suppliers, there are domestic economic factors that are expected to keep supply high in the international market. Additionally, analysts say Middle East suppliers would tolerate price decline up to a level that matches the cost of US shale oil. The continued higher supply could be tactical to prevent US producers from working on new high-cost supply sources. We keep in mind that despite the obvious benefits to consumers, a prolonged slump in oil prices could have serious implications for investments in new oil production.
Cesar Perez is the chief investment strategist Emea at JP Morgan Private Bank
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