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Outlook
The economic data tends to be more supportive of stock market strength going forward as we are starting to see a ‘synchronous global expansion’ (i.e. all regions participating) for the first time in almost a decade. The U.S. economy has moved back into a recovery mode after slipping into negative territory in the first quarter, while the European economies have clearly moved into recovery mode. The weaker results recently had come emerging economies, which saw forced austerity as the U.S. dollar rose in value and countries such as Turkey, Indonesia, Russia and regions of South America had to raise interest rates to hold on to foreign capital. But now we are starting to see better data come out of the developing economies as shown below in the chart of the Economic Surprise Index for both the U.S. and the Emerging Markets. While the U.S. numbers started to turn up again following the downturn due to the severe winter weather, the data from the Emerging Economies has only started turning up in the past month.
While this data can be extremely volatile, the indicators from the larger, developing economies seems to be stabilizing. The new government in India has increased optimism about the economic outlook there while Russia seems to have avoided a significant downturn in growth due to the Ukrainian situation. China has seen its economic data turn higher again while Turkish stocks have rallied almost 30% in the past three months!
Probably the biggest beneficiary of an upturn in global growth is Canada! Canadian stocks were one of the big winners coming off the lows in 2009, but then stalled and reversed two years later when the Euro-crisis hit, as commodity prices fell on worries about global growth. While Canadian stocks have recovered sharply this year and are now trading within a few points of the all-time highs set back in 2008, the road back to those highs have taken much longer here. The S&P500 Index in the U.S. and the DAX in Germany both surpassed their prior peaks over a year ago while the MSCI Global Index hit a new high at the end of 2013. Of note, resource stocks specifically still are lagging those highs and we believe there is still a big catch up trade in these stocks towards the latter half of the year. We expect materials to follow energy’s lead of last year. Of significant note is that the global mining index has finally broken out of a three year down cycle.
