Excluding the U.S., Japan and Australia, most developed countries are expected to experience a mild recession over the next year, with European countries at the highest risk, the report said.
“The U.S. economy is continuing to strengthen and we now put the probability of anemic U.S. growth at less than 5%,” said Lex Huberts, president of Mellon Capital. “This is a significant improvement from September, when the probability was closer to 20% that the U.S. economy would grow at less than 2% over the next year.”
Mellon Capital generates its own proprietary measure of leading economic indicators (LEI), with an LEI level of slightly less than 100, indicating—in Mellon Capital’s view—a significant probability of a mild economic contraction. All major developed countries except the U.S., Japan and Australia currently have readings below 100. Southern peripheral countries in Europe have the lowest LEI, but France, Great Britain and Germany also appear weak, all below 99, signaling the likelihood of at least a mild recession, according to the report.
“Looking at our forward estimates of economic fundamentals, we are cautiously optimistic on stocks given the signs of economic recovery in the U.S., positive steps toward resolving the euro area debt crisis and the general stabilization of earnings forecasts in Europe,” said Huberts. “However, tensions with Iran are a concern.”
The report also notes that Mellon Capital is moderately positive on commodities, favors emerging markets equities and favors the Australian dollar and Canadian dollar among developed market currencies at this time.
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