The latest annual report from BMO Global Asset Management contains a five year outlook suggesting that Continental Europe will face a further half decade of stagnant growth relative to the UK, US and Canada.
The report – Secular Outlook 2015-2020 – offers views on long term trends driving the global economy and markets. It is intended to provide input for asset allocations decisions.
The three key scenarios considered involve diverging growth rates, increasingly difficulty in coordinating central bank activities, and the risk that China will suffer prolonged slower growth on a relative basis.
According to the analysis provided by BMO, the most likely development is for the US, UK and Canada to enjoy better economic growth than Japan, China and Continental Europe. It estimates the likelihood of this development at 60%.
Implications of this include the need to overweight equities relative to fixed income, although it is important to recognised that equity returns will be “generated less from valuation and general market rise, and more from finding specific securities where companies have a sustainable competitive advantage to generate growth and drive earnings.”
“A number of select opportunities reside in the alternative solutions category; hedge funds and long-short equity strategies, where security selection skill makes up a greater portion of total return, would be appropriate.”
Looking to central bank activity, BMO sees an attempt to coordinate their activities, but compares it to threading a needle.
Should it be done – although BMO only sees a 25% chance of this happening and becoming the dominant investment theme – then it would suggest investors focus on ‘risk on’ trades. Equities in both emerging and frontier markets would move higher, along with cyclical and small to large cap companies. Fixed income yields would rise, generally speaking, while commodities would benefit, helping countries such as Australia and Canada. “Private equity in the alternatives spaces should also fare well,” BMO suggests.
China, meanwhile, remains an area of concern. BMO sees the likelihood of China and Continental Europe struggling as slightly higher than last year. On a positive note, it suggests that should this occur, then it can be described as ‘bending not breaking’, with opportunities still available albeit on a targeted basis. Currency risk will be important to consider should China and Europe continue to struggle.
Click here to read the report: SecularOutlook_2015-2020 Final