he European economy will continue to be sluggish in 2015 leading to the potential for political unrest, said the experts at Schroders, the giant British asset manager. However, European equities should do well in spite of this.
Meanwhile, Japan should see benefits from a weaker yen, but this will hurt other Asian economies.
The 200-year old firm, which manages $448 billion in 27 countries, presented its market view to the press last week in London.
Keith Wade, Schroder’s chief economist, said falling commodity prices will drive inflation lower, and the declining euro will stop deflationary pressure in the euro zone.
Wade is bearish on the Chinese economy, but he doesn’t expect a hard landing. Meanwhile, emerging markets continue to struggle because of the Chinese slowdown.
“A lot of headwinds are being lifted in Europe and that should help growth,” said European economist Azad Zangana, pointing to the weaker euro. Still, he remains cautious.
Rory Bateman, head of European and U.K. equities, agreed Europe’s economy will be sluggish, but that equities will do well. A weaker euro should help corporations deliver earnings growth between 3% and 5%. Falling oil prices will also help earnings. Bateman expects European financials to post double-digit earnings growth.
Still, with high unemployment across the continent, there is high potential for political unrest. Zangana doesn’t expect major upheavals, but still enough to worry investors.
Bob Jolly, head of global macro, said the high unemployment is increasing the popularity of extreme political parties, with potential flashpoints in Spain, Ireland, Germany and Greece.
Steven Cordell, who manages European equity funds, blamed the European recession Ukraine and Russia. He expects a slow protracted recovery. The German economy is suffering from sanctions against Russian companies and the downturn in China, two major export partners. Cordell agreed that the European banking system is now healthy. He said banks can access cheap capital at a 0.05% marginal lending rate from the European Central Bank.
While the credit market reflects the banks’ improved fundamentals, equities don’t. Cordell said 61% of European companies have better dividend yields than bond yields. This tells him the problem is in bond valuations, not equities. He said it’s a good time to buy European stocks because dividends are at their peak yield in excess of bond yields.
As for Asia, emerging markets economist Craig Botham said while Japan’s policy of devaluing the yen makes Japan’s exports cheaper, Japan is exporting inflation to other parts of the region, like South Korea and China. Botham added that Asia is one of the best-placed regions to benefit from a U.S. recovery, when U.S. consumers buy more electronics and consumer durables.
James Gautrey, portfolio manager for global equities, said that by the end of next year the number of people accessing the Internet from mobile devices in India and China will exceed 1 billion. The way to make money is buy telecoms in India and Internet companies in China.
“I think Alibaba is very underrecognized,” said Gautrey. “Its take rate is 2.3% compared with the 12% done by Amazon.”
Originally published in Investor’s Business Daily.