The US economy is quite strong

David Sloan, Senior Economist at 4CAST, on Equity market

Analysts at Barclays have recently released a Global Outlook, forecasting a rather modest 4% gains for global equities. Larry Kantor, Managing Director and Head of Research, says: „We see a flat US market but better prospects in non-US ones... the market continuing to oscillate around the 2100 level for the S&P500, as slowing EPS growth and prospects for higher interest rates combine with a full valuation.” Do you support those forecasts?

I do think the mentioned forecasts are reasonable, however, I would be a little more cautious on the overseas outlook. As a matter of fact, the US economy is quite strong, yet, the equity market is going to be restrained by the uncertainty surrounding the Fed policy. In case the Fed will tighten the policy this year, then there will be some negative response from the equity market. Particularly, if the key rate moves sooner than expected or if a second move will follow at the end of the year.

As for the overseas prospects, I would be skeptical about looking for strengths, as there is currently a lot of uncertainty regarding Europe. Respectively, the Greece situation does not look like it is going to be resolved any time soon in any positive way if resolved at all. In addition, there is also an uncertain prospect on the Chinese economy, even though the US economic outlook is solid, the equity markets will probably be fairly flat and even a little negative.

Since the ECB’s monetary growth acceleration, a lot of economists and financial institutions believe it is having a noticeable impact on future growth, which favour European equities. However, Greece’s unability to meet its debt obligations and make structural reforms, creates worries of default and Euro zone exit. How could this affect the market? Where should investors head to for bigger returns?

Currently this is a rather difficult question, since the Greece situation is so uncertain. I think before the new government was elected in Greece, generally the Euro zone seemed to be returning to growth and bond yield had come well off the highs. At the moment, the Greece prospects does not seem to have spread very much to other vulnerable countries within the Euro zone like Portugal or Spain. In case the Greek situation could be resolved with a long-term sustainable deal, then we could see a positive outlook in the Euro zone renewing.

As for where we should look for positive returns, it is difficult to see areas or countries, which are performing stronger than the US, even though it will be restrained by the Fed changes. Canada is one country that could do quite well, as their Central Bank is not likely to be tightening for some time. Generally, the market is sensitive to Fed risks and the risks in China.

What should investors stay focused on in order to properly diversify their portfolio?

I assume it is better to look at the longer-term prospects, and probably expect the need for taking short-term hits. I see the long-term outlook for the US economy is brightening, though there will be volatility seen once the Fed tightens. Yet, in 2016 and 2017 the Fed is not going to be very aggressive and after the initial nervous reaction to the first moves in 2015, we could see a positive outlook being reestablished. Therefore, what investors should do, is take the long-term view and be patient, while bracing themselves for a stormy period in a short-term.