Keep connected
Our investment management team is made up of engaged thought leaders. Get their latest commentary and stay informed of their frequent media interviews, all delivered to your inbox.
On the economic front we haven’t seen too much to get excited about either. The IMF recently released a ‘decidedly bad news’ report that suggests the global economy is caught in a low-growth trap as innovation withers and the population ages across the Northern Hemisphere. It goes on to suggest that the global economy will not regain its lost dynamism in the foreseeable future. According to the report, “Lower potential growth will make it more difficult to reduce high public and private debt ratios”. The developing world is likely to limp on with average growth of just 1.6% from 2015 to 2020, too little to make a dent on the edifice of public debt left from the Great Recession. The Fund said global bourses have charged ahead of reality, soaring to new highs despite a 25% slump in levels of business investment since 2008. Of course all investors seem to care about lately is what the central banks are up to on interest rate policy. On that measure, the prognosis for lower growth only means that interest rates will stay lower for even a longer time!
We do, however, see the case for slower economic growth over at least the next few quarters. While the U.S. had been pretty much the sole engine for global growth over the last few years, the headwinds of a stronger U.S. dollar and weaker growth in some overseas economies (i.e. China, Japan) are starting to show up in U.S. economic results. The chart below shows the U.S. Activity Surprise Index over the past 18 months as compiled by Bank of America. There has been a clear ‘miss’ on the economic data so far in 2015, although a lot of that is being blamed on the extreme weather conditions and shutdowns in the first quarter, as well as the Ports Strike on the west coast. While bullish investors are looking for a turnaround in the second quarter, similar to what occurred in 2014, we don’t see any such indicators yet.
However, Europe may be starting to pick up some of the slack from the weakening U.S. data. With their own version of Quantitative Easing (QE) having been launched by the ECB in January and the positive impact on exports of the 20% fall in the value of the Euro, the Euro economy is starting to see somewhat better economic data than it has in the past five years, particularly in Germany. On top of that, Europe is one of the major beneficiaries of lower oil prices as they are an unambiguous new importer of energy. But the data is a long way from anything that we would refer to as ‘robust’ and may only be picking up a bit of what the U.S. is losing.
So the U.S. is losing some momentum and Europe is picking up a bit. But the bigger call continues to be on China, where growth has slowed to the lowest level since 2008. Those numbers have continued to head lower though. Disappointing recent reports on both imports and exports, retail sales, industrial production and overall economic growth are a symptom of an economy that was severely ‘overbuilt’ with no new markets for their production and few buyers to inhabit the cities, roads and bridges built since 2008. However, as bad as the economic numbers in China have gotten, investors are clearly taking the other road on stocks, driving the indices to recent highs on a massive speculative binge of buying. While much of this was driven by anticipated actions by the central bankers such as loosening of credit and reduction in interest rates, there was also a huge shift of funds that were speculating in the housing market (which has fallen sharply) to speculating in the stock market. ‘Bad (economic) news has clearly been good (stock market) news’ when it comes to China.