A slow economic recovery might not be exciting, but as this likely keeps rates low, it may create a “sweet spot” for global equity investors, Montreal-based BCA Research suggests.
In a research note, BCA observes that the global economy is set to improve, but there is still a lot of slack, which should give equity investors some upside room.
“The sharp fall in European sovereign spreads has stopped the bleeding in the euro zone economy, but the recession has not yet ended. Meanwhile, the decline in the yen has raised expectations of better nominal growth in Japan, although the economy remains extremely moribund, with all key macro indicators still contracting. In addition, the U.S. and China are in a far better situation than one year ago, albeit uncertainty remains,” it says.
“All of this suggests that the world economy will probably continue to operate at a pace that closes the output gap very slowly,” BCA predicts, adding that this assessment is supported by the global inflation picture. Moreover, this also means it’s likely that monetary policy will stay “ultra easy”, with interest rates staying low, it says.
“This creates a ‘sweet spot’ for equity investors – modest growth, low inflation and negative real rates will support corporate earnings and embolden risk taking,” it concludes.