Growth in US equities predicted.

Despite the strong upward trend in global equity markets, equities should be favoured over bonds and cash, although equities are expected to outperform bonds by a smaller margin than in the first half of 2013, according to Russell Investments.

This sentiment is contained in Russell Investments’ 3rd Quarter Strategists’ Outlook and Barometer, a quarterly assessment of global capital markets. It features in-depth analysis of key economic and market indicators by Russell’s global team of investment strategists, who help guide Russell’s multi-asset portfolios and services.

In the report, steady growth is projected for the U.S. market over the next 24 months, forecasting the U.S. economy has sufficient spare capacity to grow without generating inflation pressures. Within global equities, Russell strategists prefer Europe and Japan due to slight improvements in the Eurozone, the success of ‘Abe-nomics’ in Japan, and the overall attractiveness of Japanese and European equity valuations relative to U.S. valuations.

Russell Investments senior investment strategist, Asia-Pacific, Mr Graham Harman, said Asia-Pacific offers opportunities in Japan, China and Australia.

“Japan is experiencing strong GDP growth for 2013, and the Chinese government is prioritising reform over short-term growth,” Mr Harman said.

Locally, while there are encouraging signs in Australia’s housing sector, the economy faces a slowdown.

“The overwhelming challenge domestically is to absorb the impact of a precipitous decline in resource sector-related capital spending, and to take up the slack in export growth, in housing, and in domestically oriented industries,” he said.

Russell Investments global head of investment strategy, Mr Andrew Pease, said economic growth in the months ahead will remain modest but robust, with Europe emerging from recession and Japan set to accelerate.

“The gains in global equity markets and rises in bond yields mean that we head into the second half of the year with equity markets offering reasonable, but not outstanding value, and with bond markets less dangerously overvalued,” he said.

Emerging markets may underperform in the near-term, but prospects are improving 

Conditions in emerging markets remain challenging for equities, given the strengthening of the U.S. dollar (USD), falling commodity prices and general geopolitical upheaval in countries from Brazil to Egypt. However, Russell’s strategists believe an export recovery and a settling of the current uncertainty around China could serve as catalysts for a rebound in the medium-term.

“Emerging markets offer good value and could rebound as exports recover amid stronger growth in developed economies and if EM central banks allow their currencies to depreciate against a stronger USD,” Mr Pease said.

Despite some challenges, U.S. economy likely to generate stable growth 

Russell’s strategists believe that U.S. employment gains will likely average 200,000 jobs per month for the next 24 months. The first increase in the federal funds rate likely won’t take place until the fourth quarter of 2015. However, the June revision to the annualised real consumption figure, which lowered the growth rate from 2.9% to 1.8%, implies less momentum going into the second half of the year.

Another challenge will be the U.S. Federal Reserve’s (the Fed) wind down of quantitative easing that is likely to begin in 2013, though it is the end date that is most significant. Russell believes the Fed is unlikely to hit their growth, inflation and Treasury yield targets this year.

Many investors fear that the current economy resembles 1994 where the Fed policy tightened dramatically, leading to a sudden rise in yield rates and choking equity growth. Russell Investments’ perspective is that the economic conditions today parallel 1984 more closely, when a bullish U.S. economy forged the way for stable global growth. Russell expects the U.S. economy to be characterised by moderate inflation, a low recession risk and stable growth.

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