In the U.S., manufacturing and business sales/inventories – two sectors of concern to us over the last several months – are showing marked improvement. News from the UK and continental Europe suggest a trough, if not better. In Japan, Abenomics – in effect an effort to stimulate nominal GDP growth above the level of interest rates and depreciate the currency – continues apace. Naturally risks remain, and the list includes political risk in Japan that could derail recent stimulus efforts, and slowing growth in China and other emerging markets. But the preponderance of evidence suggest most causal factors remain positive.

So what’s left to worry about? Our scary list includes slowing earnings growth, rising valuations in some markets and reduced fiscal stimulus in most places.

Tony Caxide

North America

Tony M. Caxide, CFA®

Chairman - Senior Investment Council

In the U.S. we had identified manufacturing and slowing business sales growth (while inventory growth remained elevated) as areas of current concern. These have or are now reversing. If this turn continues, the key remaining drag on growth would be government spending, which may also be getting less bad.

Stepping back from the current, “side window” factors, most causal and forward-looking (or “windshield”) indicators remain positive. That doesn’t mean growth will accelerate to desired levels (deleveraging and fiscal problems may see to that). But it may maintain this tepid pace of growth that everyone continues to complain about and, yet, may be just what the doctor ordered for gradual-yet-sustainable recovery from the excesses of the 2000s.

Jeffrey G, Wilkins


Jeffrey G. Wilkins,

Deputy Chief Investment Officer

Prime Minister Shinzo Abe’s political coalition won a convincing majority in the Upper House elections in July, clearing the way for him to implement his deficit-funded, stimulative policies, as well as his “third arrow” of reform and de-regulation. Already benefiting from expectations of easier money and higher inflation, the yen spot rate has hovered around ¥99 since the beginning of April, even though new monetary easing measures have only just begun. Some positive signs of a recovery include retail sales and exports, which have both materially accelerated in the first half of the year, as well as corporate goods prices, which continue to point to higher inflation. PMI and industrial production need to be watched for signs that weak demand in export markets could overwhelm the benefits of a weaker currency


Jeffrey G. Wilkins,

Deputy Chief Investment Officer

Recent reports are hinting at an economy emerging from a recessionary slump. Purchasing Manager Indexes have been rising and are now implying an expanding economy. Economic/consumer expectation surveys have been increasing. And even retail sales figures, which have been falling since 2011, may be starting to reverse their descent.

Recovering from a recession, however, doesn’t automatically translate into strong economic growth. Weak domestic auto sales, for example, reflect a consumer still handcuffed by austerity and impacted by high regional unemployment. Reducing the current austerity measures appears to be the track the nations’ leaders are on. But, given their size and role in the region’s economy, if and to what extent the current austerity measures are reduced will likely remain unanswered until after the September German elections.


Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

UK economic recovery seems to be gathering strength and speed. June’s surge in industrial production is the most convincing sign of such a trend, rising by 1.1% on the previous month – the strongest rate of growth since July 2012. With July’s CIPS/Markit PMI Service Index rising to a level unseen for six and a half years and PMI Manufacturing the strongest it’s been in three years, continuing economic strength is a most-likely scenario. Household indicators suggest that consumer sentiment is also picking up with the healthy housing market recovery. Admittedly, some drivers of growth are still not that encouraging. For example, the labor market presents a mixed picture, with employment improving but wage growth lagging inflation. Consumer debt level is still worrisome. Nevertheless, we’re getting more and more bullish on the UK recovery.

Emerging Markets

Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

Emerging markets went through a tough time in the first half of 2013, with deteriorating trade balances, slowing GDP growth, and underperforming equity and fixed-income markets. The slowdown of China’s economy (as it embarks on a re-structuring process) and the sluggishness in developed economies hampered the demand for imports. Declining commodities prices put more pain on some countries that depend heavily on commodity exports. The Fed QE scale-back talks induced a heavy capital outflow from EM equity and fixed-income markets as well. Although emerging markets provide great long-term potential, and valuation appears quite attractive, volatility may persist in the near term.