Investment Outlook for March 2019
During February a number of worries, which had been haunting global markets, gradually lost their ability to affect the global equity sentiment in any meaningful way. Global equity investors had been climbing a Wall of Worries since the start of the year most notably with respect to corporate earnings trends, the short term global economic outlook, a monetary policy shift in the US, the well-publicised trade negotiations with China, and the (perceived) high leverage in a number of key economies (China in particular). By the end of the month a number of important issues had started to lose their ability to derail an otherwise rosy global investment trend, and the lack of systemic risks to the global economy once again seems to have become the dominant driver of financial markets’ positive performances. Under these circumstances investors can expect the performance of equities to be in line with their historic correlation to profits.
Trade remains an important issue but looks less urgent now
At the start of March it became clear that, although a range of trade disputes are likely to continue to dominate headlines in the near future, trade disagreements gradually lost their ability to derail financial markets in a sustained manner. It has been interesting to note, for instance, that the massive trade surplus that Germany enjoys vs the US (Euro 49bn last year) did not inspire additional alarms in international commentaries from trade observers. Not surprisingly, the German prime minister suggested that trade surpluses are calculated in an outdated manner and do not reflect the massively increased importance of the international trade in services (where the US enjoys a significant surplus).
European economy remains in the “slow lane”
The news regarding European economic trends did not inspire investors in February with Italy, France, Spain, Germany and the UK grappling with head-winds which, although not systemic, nevertheless conspired to extend the downbeat mood in this important region of the global economy.
The European Commission, for instance, expects pretty “pedestrian” GDP growth of 1.3% this year followed by 1.6% in 2020 (compared to 1.9% in 2018). Not a lot is allowed to go wrong with this type of outlook: any unexpected head-wind could push Germany into a recession. It will be interesting to see if/when the German authorities decide to shift to a stimulative stance (Germany's government surplus is running above 1% of GDP according to The Economist).
In judging the odds for the European continent (and Germany in particular) investors should keep in mind that there is still strong support across the political spectrum for an independent central bank and conservative financial management: this is unlikely to change. A definition of the “German disease” could be: Austerity during worsening economic conditions with ample scope for stimulation.
It is important to reiterate that Germany remains a largely under-geared economy and authorities have a number of levers to stimulate if required. Germany does not seem to be dragging Europe down but does not provide any positive growth momentum either.
The US consumer is alive and well (and moving online)
Retail sales statistics for the US holiday season (November to December) disappointed, with the US National Retail Federation reporting that sales were up a mere 2.9% against an expectation of 4.8% growth. Online and mail-order sales even declined (-3.9%), thereby reversing a favourable growth pattern. Core retail sales declined modestly (-0.9%) but continued their year-on-year growth trend at +2.3% (after 4.1% in November).
Although disappointing official retail numbers should not be taken lightly it is important to keep in mind that, with ecommerce advancing at an unrelenting pace, the reliability of “classic” retail statistics has been diminishing. If one needed any proof of this notion the profit numbers of Walmart provided convincing (and unexpected) evidence of the dramatically changing pattern of US consumption: it reported earnings and revenue for the holiday season that were significantly above expectations. Walmart’s ecommerce sales jumped by 43 %, which reflects the dramatic online shift of its shopppers.
The first estimate of last year’s GDP growth also supports a more optimistic assessment of US economic trends. The US economy grew at an estimated 2.6 % in the fourth quarter last year, ahead of expectations (it grew 3.4 % in the previous quarter). The growth in GDP was driven by personal consumption, investments, exports and government spending.
Stimulation in China: a matter of time?
Survey indicators suggest that Chinese economic activity improved somewhat in February but remained subdued as China is working through a period of export weakness. The Caixin/Markit Manufacturing PMI for February increased to 49.9 (48.3 in January) which narrowly beat expectations. Also, factory output grew modestly, thereby reversing the recent subdued trend.
Last month China’s Ministry of Commerce indicated that Lunar New Year sales growth had slowed down to the lowest rate in many years at +8.5% for the total holiday period (reaching US$ 148.96bn) and contrasting with the 10% jump recorded the previous year.
Recent leading indicators for the Chinese economy suggest that the country should be on target to achieve its goal of 6% GDP growth and one can expect the first quarter growth number to be close to that target.
US Monetary policy is “on hold”
On February 26 the chairman of the US Fed, Jerome Powell, explained the Fed’s recent monetary policy stance, which suggests a “hands off” approach, is the best prediction of US monetary policy in 2019. Two sentences from his statement illustrate this point:
“In January, with inflation pressures muted, the FOMC determined that the cumulative effects of these developments, along with on-going government policy uncertainty, warranted taking a patient approach with regard to future policy changes. Going forward, our policy decisions will continue to be data dependent and will take into account new information as economic conditions and the outlook evolve.
Recent declines in energy prices will likely push headline inflation further below the Federal Open Market Committee's (FOMC) longer-run goal of 2 percent for a time, but aside from those transitory effects, we expect that inflation will run close to 2 percent.”
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