“Step forward, but look both ways”……. Global economic expansion is still the prevailing theme this month, but risks remain present and momentum may be coming off earlier than expected in Europe.
The ASX 200 had a strong June on the back of some genuinely promising signs that the pace of business activity is picking up and despite markets feeling the ongoing weakness of the big bank stocks which as we know make up a disproportionately large part of our local index. Still, sitting at 6200+ points at the time of writing we note this is as high as it has been since the GFC.
Most major global markets, the Dow Jones in the USA, the FTSE in the UK and the DAX in Germany for example were up-and-down in June with strong spurts followed by volatile patches which erased gains and can be largely attributed to the backdrop of rising political risks. Two risks stand out: (i) heightening chest-thumping about tariffs and trade wars; and (ii) instability in the Eurozone, with Brexit a real issue as the implementation date nears, and Italy looking shaky.
Italy is facing some problems. With another election around the corner (incredibly it will be Italy’s 66th in the 73 years since the end of World War II) and growing social unrest, some analysts are starting to talk about the synchronised global growth story that we have talked about so much all of a sudden looking a little less synchronised. The article ‘Spelacchio’ which appears further down this newsletter is well worth a read, though the many readers who are lovers of Italy and Rome best take a seat while doing so.
During June we met with economists from investment houses Aberdeen, Perpetual, and State Street and of course ComSec’s Craig James presented at our client night in mid-June. Across the board the mood is still very much one of positivity with their main concerns still being the political issues more so than anything economic.
Noting that Australia’s fortunes are influenced by the rest of the world, Craig James cited above average global economic growth as a great strength for us while low domestic interest rates, a strong Australian job market, and the rebalancing of housing markets were also significant positives. When asked what keeps him awake at night he said simply “politics”.
Our briefing with State Street Global Advisors took the more global view. It was interesting too as it was State Street who noted earlier on that momentum was slowing sooner than expected in Europe. They stressed that the overall view was positive though caution as usual needs to be forefront. Their presentation was titled “Step forward, but look both ways”.
- Strong unemployment levels at multi-decade lows across the OECD and that this will ultimately lead to inflationary pressures though not expected for some time. Inflation in a controlled fashion is ok.
- For the first time in decades there are now more job openings in the US than people applying.
- Historic tax reforms have provided potent incentives to companies to repatriate earnings and invest in capital expenditures to improve productivity and extend growth opportunities. In the first quarter of this year alone, capital expenditure by S&P 500 companies was estimated to have risen by 24% which is the highest year over year growth since 2011. And still they expect most of the cap-ex acceleration is still ahead of us through the second half of 2018 and well into 2019.
- While momentum may have tailed off a little in Europe they still noted that the seeds of a sustained long term recovery have been sown. Growth itself may be patchy or muted but there is a greater underlying strength than has been seen for some time.
- Japan has been going well in recent times but they are “at risk of running out of people”. Latest figures show 159 job openings for every 100 people; their demographics are working against them. On the positive though they reckon ‘Abenomics’ has resulted in a huge increase in female work force participation which is a great sign of progress.
- They remain positive on China: they see an orderly deceleration of growth, the curtailing of the expansion of credit, and a continuing diversification of the country’s growth model away from a dependence on exports towards one of greater domestic consumption.
They had an interesting view on the looming Trade/Tariff problems: China is still a massive worldwide exporter and they themselves impose “huge tariffs”. Accordingly State Street’s Head of Investments, Kevin Anderson, was unsurprised that trade issues are reaching an inflection point. While he sees a trade war as the largest threat on the horizon for 2018, they believe that President Trump is missing a great opportunity to engage China and reach a fair outcome for all rather than battle with them. They reckon the recent G7 summit was the ideal opportunity.
A couple of charts from Craig James and State Street
Chart 1: ComSec’s Outlook
Chart 2: Unemployment in Developed Markets – chart shows US, Japan, Germany, and UK all at simultaneous lows .
Chart 3: China’s presence in world trade has grown remarkably since 2000/01.
Sources: RBA, ComSec, Bloomberg, Perpetual, State Street Global Advisors, MorningStar Research.