Overview
Europe again peered into the abyss and pulled back, as Molotov cocktails and other acts of vandalism by rioters in Athens did not prevent Greek legislators from approving additional austerity measures and economic reform. Although this may not prevent eventual formal default on its sovereign debt, or even an exit from the euro zone, this stopgap measure buys time for Greece and the rest of Europe.
And time can work wonders. Greece’s possible exit from the Euro – a sure trigger for unstoppable contagion only months ago – now could actually be greeted with relief by Europeans and financial markets exhausted with missed deadlines and broken promises, and could serve as a wake-up call for others vacillating between meaningful, needed reform and sticking to discredited models (like Portugal and Italy).
North America
Tony M. Caxide, CFA®
Chairman - Senior Investment Council
In some ways, the surprise is that markets were surprised by resurgent U.S. growth and employment. We’ve felt that many “causal” factors were acting as accelerants to growth, including low interest rates, several government spending programs, falling commodity prices and recovery from the disruptions of Fukushima. These were bound to have an effect, and so they did, as the rising price of assets such as stocks and high-yield bonds reflect.
Interestingly, just as enthusiasm emerges, we’re renewing our search for stresses – trying to discern what could bring a reversal down the road. We would view a meaningful increase in commodity prices, weaker profits and/or tighter bank lending standards as potential triggers for caution, but it appears premature to worry for the time being.
Japan
Jeffrey G. Wilkins,
Deputy Chief Investment Officer
Although Japanese stock market indices have benefited from the global recovery trend in the past couple of months, economic fundamentals continue to be fairly negative. Household spending and retail sales are near the lows of the last decade and their running rates indicate that this weakness may actually be accelerating.
While industrial production measures have been volatile, the long-term trend continues to indicate shrinking output, which is no doubt being impacted by the yen’s strength. The improving trend in inflation that we’ve been watching since late 2009 (which hinted that deflation could be behind us) appears to have paused or possibly rolled over, suggesting that prices could once again resume falling.
Europe
Jeffrey G. Wilkins,
Deputy Chief Investment Officer
As predicted, the euro zone’s fourth-quarter GDP weakened, actually contracting at near -1.2% when annualized. Factors both in and outside of Europe led to the weakness. Externally, emerging nations’ tighter monetary policy earlier in the year contributed to a broad slowing in imports from Europe. Internally, austerity measures are producing lower retail sales numbers and fewer new automobile registrations.
The European Central Bank has continued its accommodative stance by instituting a three-year loan facility which will both help fund the euro zone banks and encourage the banks to support the sovereign bond market. Tensions in Greece and elsewhere could remain high as stronger austerity measures, required to ‘unlock’ the next wave of financial support, will likely bring real pain to workers, pensioners and borrowers. However, while the risk of Greece’s current issues spreading to other financially stressed countries remains a real concern, lower borrowing rates and improving global economic activity may lessen the threat.
UK
Tony M. Caxide, CFA®
Chairman - Senior Investment Council
Fourth-quarter growth in the UK revealed weakness. The first estimate of GDP was at a negative 0.8% annual pace, compared to 2.4% positive growth in the previous quarter.
It remains unclear if the UK will experience another recession, but subdued growth is very likely. Household Consumption has been negative or zero in six of the last seven quarters. Gains in real disposable income have primarily supported increased savings rather than spending. As a result, the Bank of England has expanded its program of quantitative easing, which is equivalent to a cut in interest rates.
Emerging Markets
Tony M. Caxide, CFA®
Chairman - Senior Investment Council
China this year is preparing for a significant change in leadership, and many expect that change will be kept to a minimum wherever possible. Brazil is trying to cement economic gains established during the previous administration, while it spends to prepare for the 2014 World Cup of soccer and the 2016 Summer Olympics. Indonesia’s growth is strong. And yet in most cases we’re seeing a clear bias toward lower interest rates to ensure robust growth.