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.
Outside of those worries about Canadian debt levels, the global economic data continues to improve. While we are seeing many weather-related distortions in the short-term U.S. economic data, the global growth numbers are looking good. Europe is clearly through their recession, China has seen its annual growth rate stabilize in the 7.5% range, and Japan continues to make economic stimulus its top priority. The chart below shows the Global Purchasing Managers Index (PMI). After the sharp recovery in 2009-10, the index drifted lower over the next few years as the European economic crisis and lower Chinese growth put downward pressure on world growth.
The more recent data, however, has shown a rebound, driven in large part by recoveries in the developed markets such as the U.S., Europe and Japan. We expect that the immediate Canadian and U.S. economic data will continue to be somewhat distorted by the impact of weather-related delays, closures and travel restrictions, but then it should resume the solid recovery we were starting to see late last year.
The bigger risk that many investors see in the global economic outlook lately is that of emerging markets. The fact that many of these economies are highly dependent on capital inflows to sustain their growth has been a problem as capital continues to flow more to currencies like the U.S. dollar and the Euro and away from emerging market currencies. Turkey, Russia, Indonesia, Brazil and Malaysia have all been in the news recently due to severe currency fluctuations and fears about their capital flows. This has made investors more concerned about the outlook for growth in those regions. However, the reality is that the economic data out of the emerging economies has actually been getting better lately. The chart below shows the Citigroup Economic Surprise Index for the emerging markets. Most investors would be surprised to see that, after suffering a setback in the last few months of 2013, the surprises have been strongly to the upside since late December.
For whatever investors believe are the economic risks in the emerging economies right now, the data shows that the economic numbers out of those regions have been beating expectations lately. Continued expansion of the developing economies is paramount to maintaining the global recovery, since this region now accounts for almost 30% of global output.
The bottom line for financial markets, in our view, is that this is still a good time to be investing in stocks. While the market has had a tremendous, though volatile, move to the upside over the past five years, stocks remain undervalued on a long-term basis. The chart below simply shows the Price-Earnings (P-E) ratio for the U.S. stock market over the past 28 years. Despite the rise off the absolute lows seen in 2009 and again in 2011, the P-E ratio remains below the long-term average. Moreover, for all the commentary that U.S. stocks are once again in ‘bubble territory,’ the data clearly doesn’t support that notion as valuations remain well below those seen in the late 1990’s.
Also, new Fed Chair Janet Yellen appears to be following in her predecessor’s shoes by advocating a strategy that favours continued low levels of interest rates until the economic data becomes sustainably stronger. In her testimony to Congress this past week she indicated that The Fed, in effect, will continue to protect the downside for most investors by keeping monetary policy relatively loose. The Fed will continue to gradually reduce its monthly bond purchases unless officials decide the economy has slowed substantially. A recent spate of bad weather in parts of the country make it hard to form a judgment now, but the main takeaway was that central bank policy is on cruise control until officials get a better read on the economy’s performance. While we still expect more volatility and some corrections along the way, the trend for stocks should remain up.