By Tomo Uetake and Hideyuki Sano

Principal Global Investors has upgraded its view on the U.S. economy and equities as it sees higher growth because of likely tax cuts and increased fiscal spending from the incoming U.S. administration, its chief executive officer said on Friday.


But Jim McCaughan told Reuters in an interview the U.S. economy could be near full capacity utilisation, suggesting a risk of inflation and higher borrowing costs, which could eventually lead to a mild recession.


McCaughan said U.S. shares looked attractive because of an improving growth outlook, noting that his firm raised its projection for U.S. growth next year to about 3.5 percent from 2.5 percent, after the Nov. 8 election.


The Federal Reserve was likely to be more aggressive in raising rates, he said, adding that his firm expected at least two to three rate increases, possibly four, next year, compared with two it saw before the elections.


"The U.S. is a very attractive destination for investment right now. And for the next 12 months, I think the U.S. will be the most attractive," he said.


But the New York-based chief executive said President-elect Donald Trump's stimulus efforts could overheat an economy that may be near full capacity.

U.S. unemployment fell to a nine-year low of 4.6 percent in November.

"The big question will be what happens after those stimuli, does it continue to work in 2018 and that's out there as a question mark," he said.

McCaughan said the next recession would probably occur within 18 months to four years but it would be milder than the downturn that followed the 2008 financial crisis.

Principal liked small- and mid-cap U.S. shares more than global companies which could be hit by trouble outside the United States, he said, citing the European banking sector and credit issues in emerging economies as risks.

The firm had become cautious on European shares because of mounting political risk, such as a so-called hard Brexit for Britain as it leaves the European Union, or a rise in anti-euro sentiment in the euro zone.

"A 'hard Brexit' would be bad for both Britain and the euro zone because trade is quite important for both of them. And I think, unfortunately, it's looking more and more likely."

In addition, elections in four of the euro zone's five biggest economies next year were likely to see a boost for anti-euro political parties, he said.

McCaughan said he expected the euro to head to parity against the dollar, and the yen to soften to 125 to the dollar within the next 12 to 15 months as the dollar rises on the strength of the U.S. economy.

Principal Global Investors is headquartered in Des Moines, Iowa, and had $420 billion in assets under management as of Sept. 30.