Muted inflation enables Fed to keep policy loose, says Fidelity Worldwide Investment
Hong Kong, 13 January 2015: Looking into 2015, the effects of the disinflationary shock from lower commodity prices and a stronger USD should prevent the Federal Reserve from tightening and lend support to global growth and the US recovery.
Anna Stupnytska, Global Economist, Fidelity Solutions, Fidelity Worldwide Investment, says, “The US is expected to continue growing at a solid pace at the 3.0-3.5% range for real GDP growth in 2015, on the back of renewed housing acceleration and stronger consumption, as lower oil prices boost real disposable incomes.”
The Federal Reserve is moving closer towards normalising rates. However, Ms Stupnytska believes that falling commodity prices and strengthening of the US dollar should keep inflation at bay through most of the year, lifting pressure off the Fed to hike rates at least until the second half of 2015.
Commenting on Europe, Ms Stupnytska says, “We are currently having one of the largest and fastest oil price falls in history, which exacerbates a further drop in inflation in Europe. The Eurozone’s inflation rate fell into negative territory last month for the first time since 2009. This would force the European Central Bank into further action, including large-scale purchases of sovereign bonds likely to be announced as early as Q1 this year.”
China is also expected to introduce further targeted easing measures over the next few months. “While the latest cut in benchmark interest rates sends a clear signal on the government’s readiness to take measures in order to avoid a hard landing scenario, it is unlikely to have a meaningful impact on the real economy. More support will also come from the fiscal side, including speeding up infrastructure construction, which should help growth in the first half of 2015. The Chinese economy remains on a structural slowdown path, but I believe it likely reached the bottom of the mini-cycle in the latter part of 2014. A slower rate of deceleration in the property sector suggests the recent policy changes, including the targeted easing measures, have started to feed through,” Ms Stupnytska adds.
Ms Stupnytska believes divergence in central bank monetary policy will continue in 2015, but its impact will be limited. “Currency and interest rates are likely to act as equilibrating mechanisms, constraining the impact of differences in central bank policy,” she says.
Continued differentiation in Emerging markets is another big theme for 2015. Emerging market growth will continue to be influenced by a variety of factors, including exposure to the US and China, dependency on commodities and progress on structural reforms. “Broadly speaking, emerging markets with close links to the US are likely to deliver better growth outcomes as the US economy continues growing at a solid pace. Countries like Korea, with closer ties to the US, are better positioned in this respect relative to countries like Indonesia, which are more vulnerable to China’s continued slowdown. Lower oil prices will also put further pressure on energy exporters such as Russia and the majority of Latin America. Energy importers such as Thailand, India, Korea, Turkey and Central European countries are set to benefit most from better terms of trade and/or lower inflation,” Ms Stupnytska adds.
Structural reform is key to longer-term growth success in emerging markets. Ms Stupnytska says, “Now, and throughout 2015, Emerging market countries are at a crossroads: face up to the urgent structural reforms needed to improve growth prospects internally, or risk spiralling further into a state of sluggish growth. It is the progress on structural reform that will help separate winners from losers over time.”
“The US-led global recovery looks set to continue in 2015 as loose monetary policy supports a bull market that has already seen America’s S&P 500 index triple from its March 2009 low. The environment is similar to that of the disinflationary 1990s with China playing the role of Japan as a large industrial economy undergoing a structural slowdown. We are bullish on US equities and the dollar, cautious on commodities and export-driven emerging markets,” Ms Stupnytska concludes.
About Fidelity Worldwide Investment
Fidelity Worldwide Investment is an asset manager serving retail, wholesale and institutional investors in 25 countries globally outside North America. With USD $276 billion assets under management (AuM), we are one of the world's largest providers of active investment strategies and retirement solutions. Our 6,900 employees serve millions of retail clients and intermediaries such as banks, financial advisers, and insurance companies. Our more than 450 institutional clients include pension funds, life insurers, endowment funds, family offices, and sovereign wealth funds. Around 850 companies trust us with investing or administering their employees' pension assets. Investment is our only business: We have no competing financial services activities, and are focused entirely on enabling our clients to achieve their financial goals through outstanding investment solutions and service. Open-ended mutual funds, which provide investors with liquid access to all major asset classes, are the main products of Fidelity Worldwide Investment. For institutional clients we offer segregated mandates, as well as component or multi-asset solutions, and manager selection. Investors in a number of countries can also access funds of other managers through our open-architecture platforms, which currently hold USD $81 billion (AuA) of third party investment products. (Data as at 30 September 2014)
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