Rates, yields and equities higher in 2015 given global reforms, says PineBridge Investments

NEW YORK, Dec. 10, 2014 /PRNewswire/ -- According to global asset manager PineBridge Investments ("PineBridge"), the global economy will experience rising interest rates and yields in the coming year, with equities and the US dollar expected to be strong performers and US GDP growth increasing above 3% in 2015. Economic reform in emerging markets and normalizing monetary policy are forecast to be the dominant macro trends.

In its annual Investment Outlook, titled, "Divergent Paths: Investing in an Unsynchronized World," PineBridge Investments also highlighted its asset allocation team's view that the revival of Europe will be the biggest surprise in 2015, with Japan, Mexico and India also expected to be strong performers. Other top picks include the US dollar, mid-market direct lending and timber.

Markus Schomer, Chief Economist at PineBridge Investments, believes that monetary policy and economic reform are not only the two macro pillars of the economic outlook for 2015, but both are also expected to impact economic and market performance for several years to come.

"Not all countries are far enough along the recovery path to afford such a monetary stimulus withdrawal. Hence, the start of the global rate hike cycle will split the global economy into two camps: one where central banks follow the Federal Reserve towards a more neutral monetary policy setting; and one where weak growth forces central banks to keep rates lower for longer,"  Schomer said.         

"The emerging markets (EM) reform cycle is the second pillar of our 2015 outlook. The main catalysts are elections that brought to power new, more business-friendly governments in countries like India and Indonesia," he added.

Michael Kelly, PineBridge's Global Head of Asset Allocation, also cited monetary policy as a significant driving force in investment trends with the quantitative easing ("QE") baton being passed from the Federal Reserve to the Bank of Japan and the European Central Bank. PineBridge sees 2015 as yet another year where fundamentals take a backseat to surging liquidity.

"So 2015 is one 'last hurrah,' the grand finale before we shift regimes into a low nominal return world with rising volatility and inflation for years to come," said Michael Kelly. "This makes 2015 an important year to begin rebuilding allocations to private markets as protection from volatility and from less favorable public markets."

Kelly added, "Only now are markets gaining comfort that the end of the Fed's QE program is not the end of global QE."

Fixed Income

PineBridge also predicts that the fixed income markets will enter a new period with the potential for greater short-term volatility, but ultimately, policy divergence across interlinked markets could leave us not too far from where we start the year.

"Relative demand for US Treasuries should put a ceiling on intermediate and longer-term rates, resulting in a flattening yield curve over the next two years.  Diverging policy actions should also result in a stronger US dollar and softer commodity prices," according to Steven Oh, Global Head of Credit and Fixed Income for PineBridge Investments.

Private Markets

From a credit standpoint, PineBridge expects that banks will continue to serve a shrinking role in middle market lending, as predicted last year. Less-regulated institutional funds – including credit funds, finance companies and business development companies (BDCs) – will fill the growing void. PineBridge predicts that primary and secondary markets from the US to Africa will benefit from the pullback by lending banks.

"We believe GDP and asset prices will begin to converge as developed markets lead the improvement in growth momentum. Emerging markets will also gradually cast off the regulatory and political impediments that have held back growth rates in past years. In turn, we expect this to produce a rich market for investing," stated Steve Costabile, Global Head of Private Funds Group, PineBridge Investments.

Emerging Markets

In 2015, what will differentiate prospects for emerging market regions and countries is the degree to which governments embrace economic reforms to boost economic growth.

"In 2014, Indian and Indonesian voters rejected incumbents who lacked the courage to tackle vested interests that were hindering economic growth. Now Indian Prime Minister Narendra Modi and Indonesian President Jokowi look likely to ease business regulation and to use fiscal reform to stimulate investment and consumption. Both realize they have to accelerate the rate of growth to improve living standards," Schomer states. "We expect both economies to post stronger growth rates in 2015." 

United States

PineBridge's global outlook examines the improving US growth trend allowing the Federal Reserve to begin normalizing policy rates. PineBridge projects that the US federal fund rates will reach 1% by the end of 2015, up from 0.25% the past two years, and central banks in countries experiencing similar improvements will follow suit. Yields will rise, as will the US dollar and US equities.

The Investment Outlook notes, "The changes in interest rate differentials will boost exchange rates versus countries were central banks leave rates lower for longer. That growth backdrop supports further appreciation of the US dollar and offers further upside for equities."

PineBridge predicts that the US expansion, while modest, will continue to lead global growth. Consumer spending may be a drag for much of the rest of the world, but it looks to remain on a steady track in the US, driven by continued job growth, credit availability improvements, low oil prices and the potential for modest government spending increases. 

Mexico

Reform is expected to be a key differentiator in Latin America, with PineBridge projecting that politicians who "show courage" by embracing economic reforms will win elections.

"The case of Mexico is particularly exciting; one of its key reform pillars is the opening of the country's energy sector to foreign investment," Schomer notes. "That is expected to increase oil production dramatically in the coming years. As a result, we are looking for a sustained improvement in Mexico's underlying growth potential. For 2015, we project an improvement to 3% growth and we expect further acceleration though the end of 2016."

Europe

In Europe, bank lending is still contracting, adding to the headwinds from fiscal austerity. However, PineBridge expects a boost to exports from a weaker Euro and sees a growing possibility of a Eurozone-wide fiscal stimulus package.

The report states, "We expect a 1.1% growth rate in 2015. That is not particularly buoyant, but it is an improvement from essentially zero growth in the past three years. It should take the pressure off the ECB and allow the Bank to undo extreme measures such as negative deposit rates that banks have started to pass on to their account holders."

Russia

PineBridge believes that Europe will need to re-embrace Russia to restore the mutually beneficial relationship between the provider of energy and providers of capital goods. It will take time to heal the economic wounds, so PineBridge projects that Russia's economy will grow barely above 1% in 2015.

"The simmering Russian/Ukraine conflict was bound to hamper economic prospects in Eastern Europe. Sanctions pushed Russia to the brink of recession and hurt Eurozone growth prospects too. Capital flight and declining oil prices have exacerbated the economic crisis in Russia. This should create sufficient incentives to resolve the conflict peacefully," according to the report.

Japan

In Japan, recovery was interrupted in early 2014 when the government prematurely increased consumption taxes that pushed the economy back into stagnation.  

According to Schomer, "It took the authorities longer than expected, but the Bank of Japan (BOJ) eventually increased its asset purchase program and the government abandoned ideas of a further tax increase in 2015. That and the sharply weaker yen should pull the economy out of recession. Similar to the Eurozone, we expect only a moderate improvement in Japanese economic growth to 1.1% after barely growing at all in 2014."

Asia-Ex Japan

PineBridge believes 2015 will be a challenging year for equities in much of Asia.

"On a positive front, lower oil prices should benefit most countries in Asia, including China, India, Thailand and the Philippines. We are also positive on Macau gaming companies due to an increase in the number of hotel rooms," commented Anik Sen, Managing Director, Interim Global Head of Equities at PineBridge Investments.

About PineBridge Investments

PineBridge is a global asset manager with nearly 60 years of experience in emerging and developed markets, delivering innovative alpha-oriented strategies across asset allocation, equities, fixed income and alternatives. PineBridge manages over US $70.8bn in AUM worldwide as of September 30, 2014. 

For further information please contact:

PineBridge Investments 
Monique McLemore / Ashley Leifer 
+1 646 857 8579

Brunswick Group 
Beatriz Garcia / Alex Yankus 
+1 212 333 3810

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SOURCE PineBridge Investments

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