Global growth prospects are weaker than before the financial crisis, according to the head of research at Prudential Portfolio Management, as the world struggles with still high levels of debt and the economic slowdown in China.
The global economy remains fragile, David Shairp warned, and another worldwide recession could be sparked by a number of immediate factors including heavily indebted emerging markets.
Some emerging economies have high private sector debt weighing on their growth prospects and leaving them vulnerable to financial and economic shocks, Mr Shairp said.
Against that backdrop, a broad-based, deep and prolonged market rout could cause a wave of defaults inemerging markets, causing a vicious cycle of falling global growth and investors pulling out of markets.
He added: “Similarly, a possible hard landing in China will clearly damage global growth and possibly be deflationary. We don’t see a hard landing at this stage but it is out there.”
Mr Shairp also said Prudential was monitoring debate over the potential for a recession in the US. He said he expects the Federal Reserve to raise rates twice in the second half of this year, with the Bank of England raising rates once: “It’s going to be gradual, not disruptive.”
|What to expect for 2016? Prudential Portfolio Management Group|
|• Equities: unexciting prospects, expect low-positive returns|
|• Eurozone equities: best placed|
|• Government bonds: for bond returns, focus on geographical dispersion in returns and volatility|
|• US high yield: starting to offer value if spreads widen further from here|
|• Emerging markets: further pressure expected, focus on individual markets; value not yet compelling|
|• Inflation protection: seeing some value in US break-evens for investors with a longer-time horizon|
|• Property: positive on eurozone direct property|
|• Risks: potential structural political changes|
|• Watch: look at sentiment swings instead of prolonged trends|
Mr Shairp echoed predictions that the run-up to the Brexit vote will see a lot of volatility and weakness in markets, with a potentially dramatic impact. Diversification is the only tool to “at least protect the downside,” he said.
The multi-asset fund provider also commented on a recent report by CWC Research and the langcat, which highlighted problems with fund-charging data and a lack of transparency on discretionary fund management and multi-asset products, claiming it is almost impossible to anyone who is not an analyst to compare providers and select the most suitable option for clients.
Andy Brown, investment director at PPMG, said it was a good debate to have: “We think the way the regulator is pushing that transparency is a good thing. We have worked with langcat for a couple of years and are very supportive of what they are trying to do.”