Fears about the emergence of global deflation in 2016 have been overemphasised, with financial markets set to benefit from US economic expansion, says Franklin Templeton.
Franklin Templeton global macro chief investment officer Dr Michael Hasenstab has given an upbeat assessment of prospects for markets in 2016, with no global recession on the horizon.
"Despite downward revisions to 2016 global growth projections by the International Monetary Fund, the Templeton global macro team does not anticipate a global recession or global deflation," Dr Hasenstab said.
Franklin Templeton's growth projections for 2016 are 2 to 3 per cent for the US; above 1 per cent for the eurozone; around 1 per cent for Japan; and between 6 and 7 per cent for China.
"Fears of global deflation are unwarranted. Markets have, in our view, overestimated the extent to which lower headline inflation reflects structurally weaker global demand," Dr Hasenstab said.
"The belief that inflation has become structurally lower has made some investors complacent on taking interest-rate risk, in what we believe is a dangerous part of the yield cycle.
"When commodity price base effects on inflation roll off in the first half of 2016, we expect US inflation to get back to the [US Federal Reserve's] target," he said.
Turning to China, Dr Hasenstab said the volatility triggered by events in China in September 2015 was an "overreaction" – adding that China's economy is "not headed for a hard landing".
"China’s economy has continued to expand at 6.5 to 7 per cent. Some of the traditional engines of growth like manufacturing, real estate and local government spending have stalled or contracted; and new engines like the service sector and a new generation of private sector companies have taken over," he said.
"We continue to view the recent moderation of growth in China as an inevitable normalisation for an economy of its size and expect growth in China to remain within range of its current expansionary pace in 2016."
Concerns about a "systemic crisis" across emerging markets in the second half of 2015 have also been exaggerated, Dr Hasenstab said.
"Investors should not view the emerging-markets asset class as a whole but should instead selectively distinguish between individual economies," he said.
"In our assessment, several specific emerging market currencies are fundamentally undervalued and are poised to appreciate over the medium to longer term.
"A strengthening US economy, along with the likelihood of higher US interest rates, may increasingly magnify the fundamental differences between healthy and vulnerable economies," Dr Hasenstab said.