In its recent five-year outlook report, BMO Global Asset Management presented its base case scenario for global growth on “more than one cylinder” with the US economy the driver, Japan reforms bearing fruit and a clear recovery in Europe.
“Within the most likely scenario we’ve identified, we expect global economic growth, which has currently been centered in the US, to broaden – particularly to Europe and Japan,” said Barry McInerney, the firm’s co-chief executive.
Low energy prices will be a positive for consumers in these three economies.
In other key countries, BMO expects China’s GDP growth to continue slowing, but in an orderly way as it transitions to a consumption-led economy.
India is “emerging as `China 2.0′, looking like China 15 years ago”. Among the positive factors in India are a highly-educated and English-speaking population, favourable demographics driving savings and investment, the benefit of lower oil prices, a British legal system, and increasing industrial production, the report said.
Given the base case scenario of slowly widening global growth, the firm is emphasising an overweight on equities relative to fixed income; selective investments in emerging markets; and “alternative strategies exhibiting skill at exploiting style premia”.
“In our base case, we remain overweight equities relative to fixed income, given the persistently low yield environment throughout most of the globe, as well as the likelihood of further interest rate increases in the US,” the report said.
Upside and downside
The report also offered an upside and downside scenario over the next five years, each with a 20% probability. Both of these scenarios involve the actions of policymakers.
The upside-surprise scenario is based on global policymakers are able to get everything right, both in the short and intermediate term. For example, in Europe, governments must “continue to enact prudent budgets, putting their growth dividend to work retiring debt” and “allow forgiveness of Greece debt without the risk of contagion”.
The investment implications of the upside scenario would be captured by a full “risk on” full asset class exposure, “with a focus on cyclical sector equities and non-US companies with high, domestically generated revenues, particularly commodities producers”.
The downside scenario sees one or more policy errors resulting in a surprise slowdown in the global economy. Given the number of consequential policies being contemplated and the number of central banks contemplating them, miscues are likely to happen, the report said.
The investment implications focus on the flight of money to quality and safety, which includes long-dated US treasuries and large-capitalisation equities from Germany and the Netherlands, as well as the US.