For example, let us look at the US. In terms of demographics, special attention is paid to the labour force participation rate, which is now stabilising after the concerning slide of the past decade. In the social category, the focus is on inequality and how improving labor market conditions are benefiting lower- and middle-income households that had suffered from liquidity constraints. With regard to US politics, a strong partisan separation that limits the scope for reforms can still be seen. Finally, the picture in terms of economic health is positive: stronger internal demand can make the US economy resistant to external shocks, and the low oil price may have a net positive effect on growth.
Financial stability at the asset class level with each asset class mapped according to its economic backdrop, valuations, technical and risk sentiment indicators, should be considered. The assessment of government bonds, for example, may be negative for valuations and risk sentiment, but technical reasons (flow dynamics) may likely keep rates low in 2015 despite an improvement in economic conditions. This framework may enable an investment manager to constantly monitor stability conditions globally, and contribute to important asset allocation decisions.
4. Emerging markets could be a source of instability in the next few years. How can investors participate in this area?
The outlook for emerging markets is challenging. The rapid increase in leverage, the deteriorating economic growth and the proximity of the Fed tightening cycle are the biggest concerns. However, there are opportunities driven by divergence in the ability of different nations to face the current headwinds. The economic and stability conditions of each country are analysed to assess the quality of growth, the effectiveness of monetary and fiscal policies and the commitment to reform. This can help an investment manager enter emerging markets with strong convictions and to further enhance his pursuit of alpha.
Indian and Chinese equities remain favourable choices from a medium-term perspective, as I believe both countries are well positioned to succeed in the transition of their growth model through structural reforms, bringing improvement in the business environment and in resource allocation. For this reason, despite the challenges and risks ahead, these two countries stand out among the emerging markets. For China, transition also means abandoning growth built on credit and investment in favour of a more balanced path that focuses on expansion of the service sector and consumption.
5. What other risks are there?
Geopolitical uncertainties are the most obvious risks at present, and they are exacerbated by the deteriorating situation in Greece. Concerns about a potential Greek debt default and exit from the eurozone may have substantial implications for financial assets.
