Towers Watson Foresees Moderate Global Growth With Downside Risk
22 October 2014 - 12:05AM
Business Wire
The company reaffirms its cautious stance on the economic
outlook and investment-grade credit
In its Secular Outlook 2014: Investing Under a Cloud, Towers
Watson (NYSE, NASDAQ: TW) concludes overall global growth in the
next three to five years will be moderate and divergent on a
country basis, and risks to global growth are skewed to the
downside. The paper also indicates that Germany and the U.S. have
reasonable medium-term growth drivers, but that the U.K. remains
heavily indebted and sensitive to interest rate increases. The rest
of Europe and Japan are in a difficult economic environment and in
danger of remaining in a negative situation of low interest rates,
weak growth and low inflation, according to the company. The report
says a combination of gradual but significant currency appreciation
and rapid increases in wages means Chinese labor is now materially
less competitive than it was five years ago and will grow at a much
slower pace over the next decade compared to the past 10 years.
“Given the depth of the previous contraction in many economies,
the large policy stimulus required to offset it and the subsequent
slow recovery, policymakers are likely to remain under pressure to
support growth in the next few years. In the absence of a negative
event, our base case is for continued but modest recovery and an
unusually extended economic cycle,” said Robert Brown, chairman of
the Global Investment Committee at Towers Watson. “However, all
will not remain equal, and ongoing indebtedness pressures in much
of the developed, and some of the emerging, world exposes the
global economy to the continuing prospect of negative shocks. This
could be compounded by the inability of many policymakers to
respond, given how many policy levers have already been
pulled.”
In Secular Outlook, Towers Watson reiterated its rating of
moderately unattractive on investment-grade credit, which it
downgraded prior to recent spread widening. Despite this, it
advises investors to revisit credit exposures and decide whether
alternative asset mixes are preferred in an environment where
economic risks are growing and skewed to the downside.
“If investors want to take advantage of this view, they could
replace exposure to investment-grade credit with a blend of
equities and gilts that offer a similar level of long-term return,”
said Brown. “This could be implemented gradually by not buying more
credit from inflows, rebalancing or de-risking. Or they could
change the sectors of the credit market to which they are exposed,
with the aim of finding those that offer more value.”
In the report, Towers Watson states it is not immediately clear
whether investors should be worrying about high or low inflation
over the next three to five years. Also, any pent-up upside
inflation from extraordinary monetary policy may be unleashed if
private sector credit creation increases sharply, whereas the data
show a worrying disinflationary inertia.
“As some of the world’s largest central banks begin to emerge
from a grand-scale monetary and fiscal experiment after the
financial crisis, now is probably the time to worry about more
extreme inflation outcomes — something we term ‘tailflation,’” said
Brown. “Our view is that inflation risks lie to the downside over
the medium term as ongoing deleveraging pressures and significant
(although sometimes disguised) economic slack continue to limit the
impact of increases to the monetary base.”
The company also urges long-term investors to grapple with
unknowables that can affect their investment portfolios through
upside and downside risks. It identifies a number of new
technologies (such as bio, nano and clean) and big data as having
the potential to enhance productivity on a global scale, creating a
highly positive scenario for many asset class returns.
“Often, the effects of these technologies will be gradual, but
successful technology has the potential to develop into significant
regime-shifts at an uncertain point,” added Brown. “Clearly,
technological change is not without its downside possibilities.
Significant dislocations in industrial structure and labor markets
can emerge as new technology is employed, leading to increases in
unemployment. However, retooling and re-skilling eventually enables
technology-led productivity improvements to dominate.”
Secular Outlook 2014 also includes articles on:
- The path for interest rates —
The balance of pressure on monetary policy
- Investment outlook and
recommendations — Market-by-market expected return implications
and investment recommendations
- Credit markets — Beyond the
sweet spot of the credit cycle
- The Chinese growth model —
Rebalancing and slowing growth in China
- Emerging market equities —
Emerging market equities are currently attractively priced
Towers Watson Investment
Towers Watson’s Investment business is focused on creating
financial value for institutional investors through its expertise
in risk assessment, strategic asset allocation, fiduciary
management and investment manager selection. It has over 800
associates worldwide, assets under advisory of over $2 trillion and
over $65 billion of assets under management.
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global
professional services company that helps organizations improve
performance through effective people, risk and financial
management. The company offers consulting, technology and solutions
in the areas of benefits, talent management, rewards, and risk and
capital management. Towers Watson has more than 14,000
associates around the world and is located on the web at
towerswatson.com.
Towers WatsonBinoli Savani, +1
703-258-7648binoli.savani@towerswatson.comorEd Emerman, +1
609-275-5162eemerman@eaglepr.com
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