Worldwide economic growth expectations are in steady decline and portfolio performance in 2015 will be far more dependent on the U.S. economy than at any point in the post-crisis era. Canadian investors should hope more fervently than usual that the early-year optimism on the U.S. economy – which, in recent years, has brightened with predictable frequency – is justified.
The first chart shows the drastic reduction in world economic growth expectations for next year. The consensus economist guess on Canadian growth for 2015 was dropped from 2.7 per cent to 2.5 per cent during 2013 and remained there through 2014. For the Americans, the forecast has rarely deviated from three per cent.
Globally however, economists have become increasingly pessimistic over time, ratcheting expectations lower from 3.4 per cent growth to 2.9 per cent.
The second chart shows the GDP growth expectations for prominent regions and nations. Asia is the clear standout, but with the Chinese economic miracle wobbling, investors will likely remain skeptical about the prospects for investment in the region.
The U.S. is second behind Asia, with three per cent growth expected. After that, the choices dim considerably. Australia's 2.8 per cent growth projection looks okay, but the country's market is very similar to Canada's (offering little diversification value for domestic investors) and its close economic connection with China implies additional portfolio risk.
Latin America, formerly a global growth engine, looks terrible for 2015, with regional growth expectations averaging 2.0 per cent. The European Union's growth prospects are even bleaker.
There are two important investor implications to the trends as they now stand. One, Canadians should emphasize investments that are sensitive to U.S. economic growth. U.S. retail-related stocks like Federal Express. Corp and Comcast Corp, both of which were recently added to Bank of America's US1 list of top picks, look particularly promising.
Two, if the U.S. economy begins to disappoint, investors should become defensive, raise cash holdings and protect capital. The U.S. economy has been on the verge of ramping up before, only to fall back. In 2015 the stakes appear higher – there doesn't seem to be anywhere else promising for investors to go.
Follow Scott Barlow on Twitter @SBarlow_ROB.