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Better days ahead for world economy, says Aviva Investors

Aviva Investors has improved its six month outlook on the global economy following September’s aggressive policy response from the Federal Reserve, the European Central Bank and the Bank of Japan.

Aviva Investors’ investment strategy team, which provides asset allocation advice to clients, has forecast a 65 per cent probability of “Better Days” as one of its three potential economic scenarios.

The improved outlook recognises the boost to growth and risk assets expected from the abundant liquidity that September’s quantitative easing announcements have created. However, the new “Growth Stall” scenario (20 per cent) highlights the risk that despite aggressive central bank action, the economic backdrop remains weak and could still disappoint.

The two new scenarios replace the previous “Hard Times” (40 per cent) and “Great Expectations” (30 per cent) scenarios, in which global growth was set to remain below trend. The third scenario “Financial Crisis”, has remained the same, but now carries half the probability (15 per cent), further supporting a more positive outlook on the world economy.

Shamik Dhar, head of investment strategy at Aviva Investors, says: “The central bank policies enacted in September removed a significant element of the near-term tail risk previously clouding financial markets. In response, September and early October saw risk assets such as equities approach their pre-crisis peaks, sovereign and corporate bond spreads narrow, and implied volatility fall to record lows.

“While our constellation of scenarios suggests a continued supportive environment for risk assets, there are reasons to remain cautious. More recently, poor earnings have caused a fall in equities and the fiscal cliff is a particular concern even after the presidential election. Our ‘Growth Stall’ scenario captures that.

“Furthermore, while the ECB successfully altered the rules of the game in September, economic struggle remains the norm in Europe. Peripheral bond markets have rallied strongly but as ever, the timelines of EU decision-makers and financial markets remains at odds with each other. Our ‘Better Days’ scenario assumes the ECB has bought European politicians enough time to come up with a credible package of debt burden-sharing agreements that will ultimately put the monetary union on a sound footing. There is a chance that they won’t be able to deliver however, which is why we retain the ‘Financial Crisis’ scenario, albeit on a much lower probability.”

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