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‘All the World’s Major Regions Are Growing Once Again’: Schwab’s Kleintop

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It’s been five years since global growth was as strong and as balanced as it is right now, according to the Charles Schwab Midyear Market Outlook report.

The eurozone, which as a region represents the largest economy in the world, has been a drag on the pace of global economic activity in recent years. But, according to Jeffrey Kleintop, chief global investment strategist for Schwab, that seems to be changing, even despite Greece’s troubles.

On Thursday, Kleintop and other market experts from the Schwab Center for Financial Research who wrote the report discussed their outlook during a conference call with the news media.

“In contrast to the U.S. where everyone’s focused on the Fed withdrawing economic stimulus, the central banks of Europe and Japan are aggressively adding stimulus,” Kleintop said.

This should help to sustain the economic recovery and support the global stock market over the next year, he says.

“In fact, both Europe and Japan [are] probably going to avoid a recession in 2015. That doesn’t sound like a controversial statement, but it’s the first time since 2010 that’s happened,” Kleintop said during the call.

Last year, there was a recession in Japan driven by a tax increase. Prior to that, Europe suffered two years of recession in part from higher taxes and budget cuts, and that was preceded by a recession in Japan from the effects of the March 2011 tsunami.

While Japan’s economy is struggling to maintain economic momentum after emerging from recession in 2014, Kleintop notes that its economy should get a boost from the aggressive stimulus provided by the Bank of Japan that is weakening the yen, along with potential for the approval of a new trade agreement that includes the United States.

Meanwhile, in Europe, economic activity is seeing something of a renaissance. Kleintop says this is largely from the depreciation of the euro, the reduction in borrowing rates and a decline in energy prices. In fact, eurozone GDP growth has accelerated to 0.9% in the fourth quarter and to 1% in the first quarter of 2015, according to Eurostat.

“So it’s been five years since global growth was as strong and as balanced as it is here today at the midway point of 2015,” Kleintop said. “That means it may be more resilient to shocks.”

Kleintop notes in the midyear outlook that it appears that 2015 may be the first year for globally synchronized growth since 2010.“It’s kind of like a stool with three legs now instead of just one or two since all the world’s major regions are growing once again,” he said on the call.

Speaking of shocks, Kleintop said there may be undue focus on Greece from investors who are examining European political developments believing it to be a repeating crisis that could flare up again and shock the system.

“Not only is the broader growth of the global economy better able to withstand the shock, the risk of a financial contagion has been greatly diminished from the threat posed a few years ago, thanks primarily to the actions taken by the ECB,” Kleintop said.

According to Kleintop, about 80% of Greece’s debt now is held by government institutions and not private investors or highly leveraged banks. And the ECB stands ready to buy the debt and recycle the bank deposits of member nations.

Thus, he notes in the report that the drama over Greece may be obscuring a general decline in political risk in Europe, and the concern over another shock may be unwarranted.

“It’s been interesting in the markets today we’ve been up, but we’re down 3% from where we were a month ago on the MSCI All-Country World Index,” he said. “Now that’s only up 3% year-to-date, and it’s been a volatile ride. That volatility is something we need to get used to, but we don’t need to brace for another shock.”

Kleintop said he expects to see further gains in the second half of the year for stocks but also warns, “Expect to continue to see a bumpy ride.”

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