Equities benefit from policymakers' commitment to reform

It may sound dull, but the global economy is looking surprisingly stable right now.

That's good as the outcome of China's economic reforms is by no means guaranteed, Europe remains mired in slow growth and Japan's prospects seem lacklustre.

For the roughly 1,200 investors managing more than US$18 trillion in assets who attended the annual Credit Suisse Asian Investment Conference in Hong Kong, the crucial thing to turn stability into positivity for equities is that policymakers stick to their promised reform agendas.

Europe is a case in point. About 45 per cent of respondents to the annual conference sentiment survey believe European equities have the greatest upside this year.

Europe was a hot tip in last year's survey, too - and that was wrong. The Stoxx 50 index fell 11 per cent in US dollar terms against a 12 per cent gain for the S&P 500 Index. The difference this year is that quantitative easing by the European Central Bank suggests a fresh commitment to reviving the euro zone.

Almost a quarter of respondents forecast good growth in Asia ex-Japan, with 12 per cent believing Japan itself would outperform.

There was a lot less enthusiasm about the United States, with only 16 per cent believing it would be the best-performing market, down from 24 per cent last year.

But there are good reasons to be cautiously optimistic about the global investment outlook, according to some of the more than 100 presentations made at the conference.

Central banker Richard Fisher, a US inflation hawk making his first speech after stepping down as a member of the Federal Open Market Committee, believes the Federal Reserve will tread carefully on raising interest rates, fearful of threatening the fragile US economic recovery. This is a great signal for global markets.

Adding to this benign environment is the increasingly positive long-term view on Europe. Jose Barroso, who until October had been the president of the European Commission for 10 years, argued that the sovereign debt crisis had brought the nations of the European Union closer and consequently more able to resist threats such as the possible secession by Greece.

Japan is reaping the benefits of "Abenomics", according to Hideo Hayakawa, a former director general and executive director at the Bank of Japan, and a weaker yen and lower oil price have helped the manufacturing sector, while there is evidence of positive wage pressures and a pickup in corporate activity.

Hayakawa believes Japan could achieve 1.5 to 2 per cent growth this year (Credit Suisse forecasts 1.3 per cent), which is well above its potential rate of 0.6 per cent.

As for China, the economy is going through a challenging phase as it shifts to a more consumer-led growth model.

Michael Pettis, a Sinologist and finance professor at Peking University, believes growth will inevitably subside as the country struggles with its debt burden and the vested interests that must be defeated to implement the next stage of reform and raise the household share of gross domestic product. But he said progress so far was encouraging. Translation: no hard landing and a manageable transition.

With a new government in India, even Duvvuri Subbarao, the predecessor to current Reserve Bank of India governor Raghuram Rajan, believes an increase in growth is coinciding with lower inflation and a stable external sector - vital if the country is to attract the US$1 trillion needed to develop its infrastructure over the next five years.

Of course, problems remain.

Geopolitical risks are rising and Russia's growing unpredictability is on many investors' minds. Anders Rasmussen, who until October was the secretary general of Nato, believes Russia is potentially more dangerous now than during the Cold War.

Added to this, deflationary pressures in Europe and Japan remain a legitimate concern.

However, it is clear that the reform process under way in many of the world's most important economies, directed by determined policymakers and supported by accommodative central banks, is believed to be working. There is more optimism than doubt - and equities should benefit.

Ali Naqvi is the head of equities for Asia-Pacific at Credit Suisse