NEW YORK – An improving domestic economy and select overseas markets present new investing opportunities, say experts at Wells Fargo Investment Institute.

While Europe and Japan continue to face economic headwinds, the economies of China, Latin America and the United States are better positioned and will help lead to incrementally higher global growth, they say.

"Global divergence is the most striking feature of the investment landscape," says Paul Christopher, head of international strategy and co-head of real asset strategy.

Experts at the institute, which was formed in December to bring together various research and strategy groups within Wells Fargo's Wealth Brokerage and Retirement unit, anticipate growth in China to slow to about 7.1% for the year. This is still double the U.S. rate, however, and much higher than that of many European nations.

"We should not expect an economy like China's to continue to grow at 9% or 10%," says Darrell Cronk, president of the institute and CIO of the bank's brokerage and retirement unit. "In fact, we would not want that as it would result in structural problems and high inflation rates."

The Chinese economy is undergoing several transformations. Sectors like services are playing a larger role. Reforms pursued by the Chinese government also give reason for an optimistic outlook. The government is pursuing an anti-corruption program.

"Short term this could create headwinds, but long term it will result in a healthier and more free market economy," says Cronk.

China is gravitating away from a state dominated economy to one in which the private sector plays a larger role, while also moving towards opening up its stock market. Perhaps most importantly, the country has vast and critical infrastructure projects in the works.

"They are talking about literally 70 new airports and thousands of miles of railroads and roads," says Cronk. "This will require immense effort and resources."

LATIN AMERICA

The benefits of growth in China will ultimately extend beyond its own borders.  All the planned construction augurs well for exporters in Latin America, who have been strengthening ties with China and the United States, says Christopher.

These exporters stand to benefit from an opportunity to help meet China's needs for raw materials as the country's workers pave new runways and roads and lay down tracks for new railroads.

It also extends to the consumer sector. "As Chinese consumers become wealthier, they will want a richer and more diversified diet. That will benefit exporters in Latin American," says Christopher.

However, the outlook isn't rosy for all nations in the region; structural and political issues may continue to hamper growth prospects in Argentina and Venezuela.

Christopher adds, "If the Federal Reserve were to raise rates too quickly, then we think that would pull some money out of the region." This would particularly hurt companies that want to raise additional capital.

DOMESTIC OUTLOOK

The outlook for the U.S. economy is also positive, the institute's experts say. They anticipate that economy will continue to grow at a steady pace and unemployment will continue to fall. Consumers will also continue to benefit from low gas prices. Their target price for a barrel of West Texas Intermediate oil is between $60 and $70 at year's end. The price currently stands at about $50, according to data from the U.S. Energy Information Administration. It was close to $110 in June.

"Overall, if we look back over 40 years at a basket of indicators, we think the economy most resembles that of the 1990s," says Stuart Freeman, co-head of global equity strategy at the institute.

They expect the Federal Reserve to raise interest rates late this year, but inflation should remain low. George Rusnak, the institute's co-head of global fixed income strategy, says that there could be some volatility in the bond markets as a result of the Fed's shift.

"We think that for investors who take a long term perspective that volatility could pose some interesting opportunities," says Rusnak.

This was the institute's first public event. Cronk says that the amount of available information has grown enormously in recent years and the institute exists to help investors and advisors sift through it all and understand it.

"There is quite literally nothing that we are not touching upon, so we think this will benefit our advisors and their clients," says Cronk.

 

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