Overview
If it’s not one thing, it’s another.
In our November edition we described how growth concerns in China and Europe and commodity price weakness had some investors in a tizzy, which nonetheless did not prevent U.S. stock prices from rebounding to record levels shortly thereafter.
Fast forward to today, and we seem to have hit replay. The triggers for volatility are both the same and different – inflation has morphed to near-deflation seemingly everywhere and Greece is now back in the news for its annual tragedy. Its new leftist government is threatening to rip up previous agreements with its lenders, the hated Troika, which are the only entities allowing the Greek government to “make payroll”. But the result is remarkably similar – after nervousness and pullbacks, U.S. stocks have just hit new highs.
But U.S. earnings growth has slowed and profit margin peaks should be behind us. Ironically, sharp gains in employment may be contributing to this. Greece could well leave the Euro if it’s not bluffing. European growth is anemic. Many emerging nations’ debt may be downgraded. So, plus ca change…
North America
Tony M. Caxide, CFA®
Chairman - Senior Investment Council
After a sharp winter a year ago, which led to a contraction in economic growth, the U.S. economy roared back with growth near 5%. But we continue to feel that the underlying pace remains nearer 2.75% to 3%. Employment gains have accelerated and the U.S. consumer has a solid balance sheet, made stronger by savings from lower gas prices, which are functioning like a tax cut and should slowly help boost spending. The manufacturing sector seems to be growing near 3+% and housing is running close to 6+%. With unemployment well below 6%, the U.S. looks pretty good compared to most. In our view, large-cap stocks look attractive for the time being, as do high-yield (low-credit-rating) bonds. And U.S. Treasury bonds still don’t.
Japan
Tony M. Caxide, CFA®
Chairman - Senior Investment Council
Fourth-quarter GDP brought Japan out of its latest recession, although many were disappointed with only 2.2% real annualized growth. In the aftermath of new monetary stimulus in October, there are many reasons to be optimistic that inflation and growth will return. Household spending, household income and exports have all been expanding meaningfully in the last several months, although spending and income remain at very low levels relative to their own histories. The weaker yen and lower oil prices are both significant tailwinds for earnings growth in a country that imports 100% of its fuel and relies on profits earned overseas. Wage hikes and reforms are sorely needed, and Prime Minister Abe appears to be committed to both. Given current valuations, consistent growth could be very positive for markets.
Europe
Jeffrey G. Wilkins,
Deputy Chief Investment Officer
In late January, ECB President Draghi launched the European equivalent of quantitative easing, comprising bond purchases of €60 billion monthly through September 2016. These purchases would eventually grow the Central Bank’s balance sheet by €1.1 trillion, back to its high 2012 level. Importantly, these actions signal the readiness of the ECB to do “whatever it takes” to stabilize member economies. Impeding progress are the divergent stances of Germany and the newly elected Greek party Syriza’s proposed reduction of austerity measures and request for bridge financing for its loan program. With inflation printing at -0.2% and trending lower, the clock is ticking for the Eurozone to resolve its disputes, align its interests, and expedite its recovery.
UK
Srinath Sampath, CFA®, PhD
Managing Director, Portfolio Management
UK economic growth slowed more than economists forecasted at the end of 2014, held back by a sluggish euro area. Growth may continue to be moderate in 2015 due to cautious business investment before this year’s general election. Nevertheless, with 2.6% growth in 2014 and maybe a tad higher in 2015, the UK would still be the fastest in the Group of Seven after the U.S. We believe its growth engine will be the service sector. With lower oil prices, consumer spending may pick up further as residents find themselves with more disposable cash. Low inflation and moderate wage growth pumped UK workers’ real wage growth to the highest level since 2010.
Emerging Markets
Jeff (Shengde) Liu, CFA®
Managing Director, Portfolio Management
In 2015, emerging economies are likely to still grow at a faster pace than their developed-world peers. Due to structural reforms, China’s GDP growth is expected to slow down further to near 7% – still high in absolute terms. Higher economic growth rates and low valuations should remain key attractions of many emerging countries. Of course, within the EM group, divergence in performance among countries will persist. China, India, Indonesia, Mexico and South Korea have announced or embarked upon significant reform measures that aim to sweep away bureaucratic barriers to economic growth, encourage entrepreneurship and expose inefficient industries to market discipline. Some commodity-exporting countries will continue to suffer. Russia in particular is facing serious challenges due to Western sanctions. Investors are likely to remain cautious towards EMs due to these uncertainties and the precise timing, pace and size of Fed hikes.