We are cautiously positive for the global economy, and for global equities in particular, as we look ahead into 2013. Global economic conditions remain challenging, and markets are still pricing in a substantial degree of bad news even after the gains made in 2012.
However, some macro improvements—the bottoming of Chinese growth, continued recovery in the United States and the beginning of the healing process in Europe—and a global environment of high liquidity will be strongly supportive for markets over the next 12 months.
Japan’s Radical Action
We talked last month about the incoming government in Japan. New Prime Minister Shinzo Abe has come to power on a strong mandate of radical central bank action and increased spending on public works in order to pull the country’s economy out of recession and end crippling deflation. Already, the Bank of Japan has increased its asset purchasing program by another $118 billion and has adopted a 2% inflation target.
Unlike in Japan, where the government’s intentions have been made clear, U.S. monetary policy has been more scrutinized. The Federal Reserve’s successive rounds of quantitative easing provided welcome support for equity markets in 2012. In December, the Federal Reserve announced that it intends to almost double its quantitative easing to $85 billion a month and said that it would continue QE until there was a “substantial improvement” in the labor market. Linking quantitative easing to employment targets in many ways makes official a policy that was already in place.
U.S. Policy Remains Expansive