Europe is unlikely to plunge into recession this year but global stock market returns should be unspectacular, according to JP Morgan.
According to Stephanie Flanders, chief market strategist for Europe, developed countries are providing the greatest optimism, with balanced portfolios expected to achieve low single digits of growth, but investors should anticipate further volatility until issues surrounding global growth and the impact of China are resolved.
Ms Flanders said, “On balance, we believe that developed world consumers can carry the recovery forward this year on both sides of the Atlantic. But at this stage of the cycle the expected returns to most traditional forms of investment are relatively low and investors know that policy makers have less room to respond to trouble than they did in 2008.’’
The year 2016 has seen a volatile start for emerging markets and Ms Flanders expects further struggles, citing China’s serious debt problems and fast-rising currency. The Yuan rose by 30 per cent in 2015, with no other country experiencing more than a 10 per cent difference.
However, Ms Flanders advised that although China must keep control of its currency, it is unlikely to pose a threat to the global recovery.
With US interest rate rises expected this year and many sovereign bonds in the eurozone still negative, Ms Flanders suggested one option for investors starved of income. “Higher-yielding corporate debt could be an attractive solution, at a time when the yield on many lower-rated bonds has moved up significantly. However, investors need to understand the factors driving yields higher to assess whether they are being adequately compensated for taking risks,’’ she said.
Energy and commodities are causing the greatest threat to FTSE All-Share earnings, with commodities falling for the fifth consecutive year, resulting in fund managers reducing weighting in this area to achieve higher returns.
Expectations for bond returns are low but not disastrous and Ms Flanders concluded improved returns could be achieved by exploring alternatives to traditional assets:
‘’In order to meet goals, investors should lower expectations or follow more sophisticated ways of diversification which go beyond the stock and bond combination,’’ she added.
