Overview
The impact from the harsh winter and port closures is largely behind us, yet energy sector weakness and the strong dollar, cautious consumers and businesses, and perhaps even the Puerto Rico near-default continue to hold the U.S. to a moderate pace. Japan, the UK and Europe seem to be marking time, breathing a sigh of relief that Chinese stocks have stabilized and Greece veered at the last minute in the high-stakes game of chicken (offering both sides the chance to win, though that’s far from assured). China is growin’ but slowin’, and doing its best to maintain stability, both economically and (the-kind-that-should-not-be-named but, well, why not) politically and socially!
Meanwhile, markets are facing tepid earnings growth and, broadly speaking, no-longer-cheap prices. Definitely a tricky environment for investors, especially those that missed the recent six-year rally.
North America
Tony M. Caxide, CFA®
Chairman - Senior Investment Council
Many factors are colluding to hold growth to a moderate pace, as captured in the Overview. But it’s only fair to also recognize areas of strength. Housing, in particular, is again in a small boom.
In a setting of supportive monetary policy and neutral fiscal policy (i.e., the government budget), we feel that the U.S. dollar will have only a moderate impact on growth, as it hurts exporters but supports consumption. Inflation continues to be buffeted by multiple forces (e.g., downward by import prices and upward by other factors). Our research reveals that its run rate has already accelerated, however. Headline prices, not so long ago at or below 0%, have been increasing at 0.8%. Core prices (excluding the volatile food and energy segments) have also accelerated, from 1.2% closer to 1.5%. And we continue to see signs of gradual rising pressures with wages.
Japan
Jeffrey G. Wilkins,
Deputy Chief Investment Officer
Japan’s recovery remains an uneven one, even as the yen sets a new 13-year low relative to the dollar. Corporate profits continue to soar, making equities look attractive. However, workers’ wages are not keeping up with meager inflation and the consumer is falling behind. “Abenomics” conceives of a virtuous cycle of rising profits that is ultimately passed on, in part, to employees who in turn drive demand and prices. Base wages are growing at a languid rate and periodic bonuses have not yet picked up meaningfully. Fortunately for consumers, energy prices are holding at very low levels, which is helping sparingly with consumption. While inflation looks to be possibly stabilizing once again, Japan’s recovery and deleveraging may take shape more quickly if consumers become active participants rather than spectators.
Europe
Srinath Sampath, CFA®, PhD
Managing Director, Portfolio Management
In mid-July, after conducting a referendum that rejected bailout proposals and enduring bank closings, capital controls and civil unrest, Greece finally agreed to negotiate toward a three-year, €86 billion loan package from its creditors in exchange for scrupulous austerity measures that would impact taxes, government spending and pensions. The Greek stock market has declined over 22 percent in dollar terms this year, and the divided Greek coalition government is expected to hold elections soon. Meanwhile, the ECB’s Quantitative Easing (QE) program, with monthly bond purchases of near €60 billion, is a third of the way along its intended trajectory, but the initial decline in the euro from the additional liquidity has paused in recent months.
UK
Jeff (Shengde) Liu, CFA®
Managing Director, Portfolio Management
The UK economy remains one of moderate expansion against headwinds from a stronger currency (vs. the euro) and lackluster external demand. A recent Bank of England rate policy meeting left an overwhelming 8-1 majority in favor of keeping rates at their current level of 0.5% and the GBP 375 billion QE program, and downgraded its short-term forecasts for inflation. The low rates can propel the UK economy a little farther forward. Current releases of PMIs indicate continuing expansion in both the manufacturing and service sectors. Some worries remain in the labor and housing markets. The UK is witnessing her “slack being used up, wages increasing and labor costs picking up.” The nationwide average house price has already exceeded the peak in 2007.
Emerging Markets
Jeff (Shengde) Liu, CFA®
Managing Director, Portfolio Management
The divergence of EM economic growth and equity market performance continues. China’s “managed slowdown” begins to feel like “China Syndrome”: decline in the growth rates of fixed investment, GDP growth, housing and corporate profits. Some of the China PMI measures are in the contraction area. Indonesia’s economic growth also sputtered, as rupiah depreciation has further “imported” inflation and higher oil prices. And Brazil’s recession deepened. On the other hand, India witnessed encouraging growth in both the manufacturing and service sectors as Modi’s reforms continue. Mexico and South Africa also showed some moderate growth.