Despite a large amount of geo-political uncertainty in the markets, various financial professionals are finding reasons to remain upbeat in terms their global economic outlook. 
However, this might be hard to stomach for many investors, as a series of macroeconomic headwinds such growth slowdowns, a commodity price plummet and an upcoming election dominate headlines.
In fact, data released last week by the Investment Association revealed that net sales for funds going into ISAs slumped by 57 per cent in the January to 5 April tax year end period.
Jason Hollands (pictured), managing director of business development and communications at Bestinvest, believes that this could well be a result of market fears, leaving many reluctant to invest.
“The big factor is likely to be mounting anxiety over market levels at a time when the news has been dominated by turmoil in the Middle East, a potential Greek exit from the eurozone and the uncertainty over the UK elections on 7 May - notably, investors have been heavily dumping UK equity funds, but a much feared election provoked correction has yet to appear,” he said.
Despite a distinct sense of bearishness tingeing the market globally, many financial professionals still think there are plenty of reasons to remain optimistic in their economic outlook.
In light of this, FE Trustnet lists six reasons why investors shouldn’t turn pale just yet.
Weak inflation expectations
Stewart Robertson, senior economist at Aviva Investors, expects inflation to stay low this year as the low oil price continues to support growth in most economies, boosting spending power and reducing costs.
“Despite a strengthening dollar, the US Federal Reserve is likely to hike rates in the summer, with the Bank of England following suit by early 2016,” he said.
“However, the eurozone and Japanese central banks are more likely to loosen policy. Overall, the environment remains broadly positive for risk assets, such as equities, particularly in the developed world. Subdued inflation expectations should support bonds too.”
US rate hikes and oil falls
James Dowey, chief economist at Neptune Investment Management, believes that the soft patch in US growth at the moment is only a temporary headwind which has been caused by bad weather and west coast port strikes.
He said: “We expect growth to pick up again in the second quarter of 2015. This is especially due to the fact that lower oil prices are proving to be sustained, so consumers will feel increasingly confident spending the extra money in their pockets.”
“As such, we are positive on domestically-oriented US companies which are not subject to a profitability hit from dollar appreciation. Indeed dollar appreciation is a part of the investment case for us.”
Dowey believes that this will continue for a couple of years yet as the US economy will be able to use its strength to cope with rate hikes.
However, he thinks that other developed markets are less well-equipped to do so.
Strong UK economy and exaggerated election fears
One of the biggest fears putting investors off at the moment is the impending UK election.
While Hargreaves Lansdown’s Laith Khalaf admits that there will be turbulence in the stock market over the next few weeks, he believes that investors should not let the election hype alter their investment plans.
“The political machinations in Westminster have little bearing on the earnings potential of UK companies, which ultimately drives stock prices in the long term,” he reasoned.
“So while sentiment may swing, investors should stick to their guns. The only possible exception to this is for higher and additional rate taxpayers to consider bringing forward pension contributions, as the days of the current tax relief system look numbered, whoever gets into power.”
Despite the UK stock market being at a record high, Khalaf doesn’t view it as expensive when company earnings are considered – the price/earnings ratio is currently 17.5 times earnings.
What’s more, he emphasises the need for diversification within a portfolio, which should minimise risks of political changes that could negatively impact some certain companies.
Khalaf also points out that the UK stock market is full of companies with an international earnings stream, which will also soften any potential blows.
“The election can cause short-term turbulence in the stock market, but it isn’t going to alter the long-term flight path,” he added.
“If you think back to the key market events of the last 15 years you would probably highlight the tech crash, the financial crisis, and the QE rally. The 2005 and 2010 elections come pretty far down the list.”
Positive evolution in Japan
It won’t have gone unnoticed that the Nikkei 225 closed above 20 000 for the first time in 15 years at the end of last month.
Around the same time, the TOPIX index reached its highest level since November 2007 and, since the start of the year, Japanese stock value has increased by 15 per cent in yen terms.
Alex Treves, head of Japanese equities at Fidelity, believes that the impact of prime minister Shinzo Abe’s introduction of corporate governance reforms has been underestimated by the market.
He said: “Japanese companies are actively responding to calls for better governance. We are seeing signs of positive evolution in capital management as companies utilise excess cash for dividends and share buybacks and increase returns on equity.”
“Just as the JPX-Nikkei 400 Index and the Stewardship Code have helped to drive return on equity towards record levels, we expect the new Governance Code that takes effect on 1 June 2015 to encourage further improvements in shareholder value.”
“More than ever, there are signs of a broad-based commitment to reforms, and with returns going up, we can expect valuations to rise over the medium term.”
However, Treves remains wary of a potential downturn in the US, the threat of deflation in the eurozone and a potential hard landing in China.
He thinks this could prompt top-down investors to take profits in the short term, but that the mid-term outlook for Japanese equities still looks appealing.
“The coordinated pro-growth policies, the changes in corporate behaviour that is occurring and the fact that Japan offers reasonable valuations in a global context should support the case for Japan,” he argued.
“As general ownership levels remain low, we believe there remain many marginal buyers to generate further inflows into the Japanese equity market. Any near-term corrections should provide investors with good opportunities to increase exposure to the Japanese equity market.”
Chinese growth expected to pick up
The slowing Chinese economy has cast many doubts in investors’ minds over whether to invest in the emerging market country or not.
While bearish investors solemnly await a collapse in China, others argue that the rapid growth the economy has experienced over the last three decades was inevitably going to lead to a pull-back at some point.
Robertson believes that the world is now learning to view the slowing Chinese economy as a normality.
“While output this year is likely to increase by around 7 per cent, this would be the slowest rate of growth seen since 1990,” he admitted.
“But, we believe this deceleration is an evolutionary process and not a cause for major concern. With the Chinese central bank having lowered interest rates and relaxed banks’ reserve requirements already in 2015, we expect growth to pick up in the second half of the year.”
“Policymakers stand ready to ease monetary and fiscal policy if needed. However, bloated levels of local government debt remain a concern.”
Eurozone – Grexit wouldn’t be the end of the world
Despite Europe being a popular investment choice for investors recently, there are still some concerns as to whether the European market really is good value for money or whether the weak euro has skewed valuations in comparison with other countries.
However, the market has rallied recently, with the MSCI Europe index outperforming the MSCI World by 3.27 percentage points and the FTSE All Share by 1.68 percentage points since the start of the year.
Performance of indices since 2015
Source: FE Analytics
John Ventre, head of multi-asset at Old Mutual Global Investors, said: “This is almost exclusively down to the weakness of the euro translating through into better corporate profits and on a translation effect for German exporters as much as anything – the rally has been substantially driven by Germany.”
“The evidence is that one of the effects of quantitative easing is to raise asset prices, and during the quarter we’ve moved into a long position in European equities which has been profitable for us.”
“What’s interesting is that the QE programme is supposed to address the economic malaise of Europe yet the PMI’s [purchasing manager’s index] leading indicator of economic growth has been much stronger, surprising on the upside for three, four, five months in a row.”
“It was really only this month the European Central Bank actually started buying bonds so it wasn’t the QE programme itself, rather the weakness in the euro in the latter half of last year that’s helping to pick things up.”
Ventre believes that European equities are a reasonable investment as the economy seems to be in good shape – this is further supported by stimulus from the central bank.
However, investors have been watching Greece with a keen eye, concerned that a potential Grexit will be detrimental to the market.
“The Germans and the Greeks are busy trying to game each other. The reality is that Greece’s debt is not sustainable and they need to default – it’s as simple as that,” he said.
“It looks like it’s going to be kicked down the road again for a fair few months but we do think it’s inevitable that, at some point, Greece will exit the eurozone.”
“We think that this can happen though without the broader crisis of last time. Not least because everyone’s had three, four years to prepare for it, which is exactly why we kicked the can down the road in the first place.”
