NAPF 2015: Disappointing economic recovery, low inflation and rock-bottom interest rates but rising asset markets are what pension funds can expect over the coming years, JPMorgan’s chief market strategist Stephanie Flanders said at the NAPF Annual Conference 2015 on Wednesday.
The former BBC economics correspondent gave her assessment of the economic outlook and how it is likely to affect pension fund investors.
The global economy could see a reversal of some more recent trends, as developed and emerging economies are diverging once again.
Flanders told delegates that domestic demand, rather than exports, is the most prominent driver of growth, and this is one area where emerging markets are lagging behind, putting developed economies in a stronger position.
“Crises are going to be where they normally are – in the emerging economies,” Flanders said.
China crisis
The events in China over the summer made a change in the economic cycle feel closer, but Flanders told investors that while another recession might not be on the cards, more volatility is.
The wildcards in Europe are not the economic cards but what happens in politics
Stephanie Flanders, JPMorgan
The ripples in China had troubled investors and even caused some panic, she said, mainly because the Chinese authorities seemed to be panicking themselves, and “because it reminded us that we have given these guys a lot of leeway”.
“It's not all bad but it’s pulling down the numbers of emerging economies,” she said.
Wildcards in Europe
European countries have also seen a turn of fortune, as peripheral economies such as Ireland and Spain are doing much better than they were, while core countries like Germany “are looking less good”.
Flanders said she did not expect dramatic growth but very good numbers – productivity is growing and so are wages. In other words there is “more money in people’s pockets but it’s not costing businesses any more as people earn more but also produce more”.
China crisis causes rethink
The cover feature of The Specialist: Investment Trends, published this week, takes an in-depth look at what the stutters in China and other emerging markets mean for pension fund investment strategies.
Read the article here.
But investors are advised to watch not just the economic factors, but the political ones too. “The wildcards in Europe are not the economic cards but what happens in politics,” Flanders said, pointing out that mainstream parties and leaders are being replaced with perhaps more extreme or untested ones.
Looking at the economic factors in the US, everything depends on a currently “confused” Federal Reserve, she said. “There will be [a rate rise] at some point, but they are not quite comfortable yet.”
But the investment environment for pension funds will depend not only on monetary policy, Flanders warned. Yields have been steadily falling in the decades preceding quantitative easing, which will continue as global growth and inflation stay low.
