Can European equities deliver on economic promise?

While a few months ago we perhaps looked overly bullish, recent data releases have suggested our above-consensus view on the European growth outlook is well-founded. Indeed, it looks like the European Central Bank (ECB) launched its Q2 quantitative easing (QE) programme just at the point when a cyclical recovery started taking shape in Europe (as shown in the above graph).

Economic data out of Germany have surprised to the upside: the IFO business confidence survey reached a 10-month high in April, and purchasing managers’ surveys also point to a more broad-based recovery across the region. Spain has been improving for some time and now Italy is also making progress. We expect to see further acceleration in growth over this year and next, as Europe will benefit from a number of positive tailwinds, among them improving consumer and business confidence and increased bank lending. While the ECB was widely expected to act, the scale and scope of the QE programme surprised markets and caused a sharp deterioration in the euro against the US dollar. This trend is set to persist as the ECB continues with its QE programme and the US embarks on a rate-hiking cycle. The lagged effect of a weaker currency, together with the lower oil price should further support a eurozone recovery.

Neil Walker – Insight, a BNY Mellon company 

While a few months ago we perhaps looked overly bullish, recent data releases have suggested our above-consensus view on the European growth outlook is well-founded. Indeed, it looks like the European Central Bank (ECB) launched its Q2 quantitative easing (QE) programme just at the point when a cyclical recovery started taking shape in Europe (as shown in the above graph). … read more

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Signs of a turning tide in Latin America

Latin America is in the throes of a prolonged fall from grace. After growth rates averaging above 5% for the first decade of the new millennium, a maelstrom of falling commodity prices and a slowdown in demand from China means forecasters are predicting neutral or negative growth through 2015.

But the winds of political change are blowing. In Argentina, burdened with high government debt and an overvalued currency, an October election could indicate a new start since all potential candidates are seen as more market-friendly than current president Cristina Fernandez. In Venezuela, likewise, a mid-term election in September could be a bellwether of popular discontent over Nicolás Maduro’s presidency, especially given inflation above 60% and an economy forecast to shrink 7% this year.1 Midterms in Mexico in July and in Colombia in October could herald similar clues as to the future direction of these important regional economies.

Colm McDonagh – Insight, A BNY Mellon company

1 IMF forecasts, April 2015

Latin America is in the throes of a prolonged fall from grace. After growth rates averaging above 5% for the first decade of the new millennium, a maelstrom of falling commodity prices and a slowdown in demand from China means forecasters are predicting neutral or negative growth through 2015. But the winds of political change are blowing. In Argentina, burdened … read more

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A new golden age of rail

Chinese authorities have significantly built out high-speed rail as part of the current five-year plan and have made no secret of wanting to be the world’s leaders in terms of track length and number of lines. Now they have announced a ‘one belt, one road’ policy, also known as the ‘silk road’

The ‘one belt, one road’ initiative is designed to connect – via rail and sea – China to Europe through India and Africa in one direction, and to the South Pacific in the other.1 China is looking for ways to boost its economy now that its growth is slowing, and one way to do that is to look outward. The businesses working in China’s rail sector have in many cases worked with Western companies and, through technological share, obtained intellectual property that puts them on par with these global leaders.

The UK’s High Speed 2 (HS2) would represent just a small fraction of the record-breaking lines being built and planned in China. Phase one is designed to run 192km between London Euston and the Midlands, with phase two potentially extending to the North-West and North-East of England and perhaps even beyond into Scotland. Yet at an estimated cost of at least £50bn the funding behind HS2 has created some controversy and public support is patchy at best.

Justin Sumner – The Boston Company Asset Management, a BNY Mellon company

1 JOC.com, ‘What is China’s ‘one belt one road’?’

Chinese authorities have significantly built out high-speed rail as part of the current five-year plan and have made no secret of wanting to be the world’s leaders in terms of track length and number of lines. Now they have announced a ‘one belt, one road’ policy, also known as the ‘silk road’ The ‘one belt, one road’ initiative is designed … read more

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King versus Carney: in a world awash with liquidity, inflation forecasting becomes less certain

The long-term effects of quantitative easing (QE), especially on inflation, are an unknown. With conventional policy we have a history to look back on. With QE it’s all new. There is no history. This means that while central governments may have got it right, the reality is no one can be sure.

Indeed, central banks themselves no longer seem confident what could happen. Consider their inflation forecasts. The first chart above depicts the Bank of England’s inflation forecast in 2005 under former governor Mervyn King. In contrast, a more recent prediction under the aegis of current governor Mark Carney shows a far wider range of possible outcomes. In a world awash with central bank-initiated liquidity the old certainties would appear to be breaking apart. It’s not an exaggeration to say Central Banks are not really sure of the implications of their actions – or whether they will create the right outcome.

David Hooker – Insight, a BNY Mellon company

The long-term effects of quantitative easing (QE), especially on inflation, are an unknown. With conventional policy we have a history to look back on. With QE it’s all new. There is no history. This means that while central governments may have got it right, the reality is no one can be sure. Indeed, central banks themselves no longer seem confident … read more

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