Previous analysis by the talking heads of Wall Street and the City expected that, even under the ‘new norm’ conditions, that 2012 would contain the strong ‘foot-hill’ fundamentals of a healthier economic era.
Previous
Stalled Expectations -
Compelling
negative incidents of the intervening four years have disproved such
simplistic expectation, geo-financial after-shocks including an
unseen level of American balance sheet indebtedness as a result of
massive QE, the European sovereign debt crisis and its affect upon EU
relations, an apparent illiquidity induced ‘zombification’ of the
western banking sector and its financial pipeline to SME clients, and
most recently the emergence and partial satiation of the US “Fiscal
Cliff”. And beyond the man-made, economic turmoil has been induced
by natural disasters such as the Tohoku Tsunami and Fukushima
Disaster in Japan and Hurricane Sandy in the USA.
US Economic Damage Limitation -
The
seemingly all-consuming concern of the US “Fiscal Cliff” has
thankfully waned; for now, “a can kicked down the road” to yet
again re-iterate the most over-used phrase of 2012. John Authers at
the FT highlights the fact that the issue was hardly cliff-like in
nature when properly viewed. So doomsday perceptions over-egged by
the excitable ‘hyper-venting’ of American TV financial
commentators reflecting an ever more docu-drama popular news
mentality.
Easing
Capital Buffers -
And
now the ‘Basel regulators’ believe that banking capital tier-1
ratios may be lowered or at least deferred, having seen improved
investor sentiment toward the banking sector and seemingly convinced
of present blocked financial intermediation throughout the EU
economy.
Thus,
presently, here at the beginning of 2013, all appears well, that
crucial interplay of Capitol Hill and Brussels easing global market
worries and placing a new footing under the jitters that promised to
stall the re-born confidence of the last 9 months in western equity
markets.
2013
General Commentary –
The
following captures the mood of both the economists’ sphere and that
of the investment banking world; with an amalgamated outlook drawn
from data sets, observations and commentary by the likes of the OECD,
The IMF and various un-named investment banks own forecasts.
Additional
comment from investment-auto-motives follows the given facts and
statements.
[NB
bank sources, taken from the public domain, are not named to avoid
bias or unintended influence].
OECD –
The
following is a condensed version of the organisation’s own text,
dated late November 2012.
-
Hesitant, uneven global recovery over next 2 years.
-
Labour markets weak, approx 50m unemployed in OECD area
-
This set to remain high as structural adjustments are enacted
-
Decisive policy action needed, led by US & EU.
-
EU remains serious threat to global economy
-
More to be done to tackle negative links across public finance,
banking solvency and EU exit.
-
EU Banking Union with 'backstops' and re-capitalisation seen as
crucial
-
EM regions to get further fiscal and monetary poliies to off-set
weakened exports
GDP
Growth Rates :
OECD:
2013 at 1.4%, 2014 at 2.3%
US:
2013 at 2%, 2014 at 2.8%
Japan:
2013 at 0.7%, 2014 at 0.8%
EU:
2013 at -0.1%, 2014 at 1.3%
China:
2013 at 8.5%, 2014 at 8.9%
BRI(C),
Indonesia and S.AfricaGDP expected to see GDP “gather steam”
“General
Outlook suggests a possible positive scenario could arise if decisive
policy actions are taken to improve business and consumer confidence,
and to boost growth and jobs worldwide. The rapid and broad
implementation of structural reforms, not least in labour and product
markets, is key to this scenario”.
As
has been the historical case, whilst the full OECD Outlook document
is information heavy on a country by country basis, the summary
itself tends to offer little by way of acute guidence, its role to
set expectation, and indeed to possibly during this dour period, to
create an aura of self-fulfilling economic confidence.
International Monetary Fund –
FT
Video recently displayed the IMF outlook for advanced economies:
Eurozone:
2012 at -0.5%, 2013 at 0%, 2014 at 1%
Germany:
2012 at 1.25%, 2013 at 1%, 2014 at 1.5% France: 2012 at 0%, 2013 at 0.25%, 2014 at 1%
Spain: 2012 at -1.75%, 2013 at -1.5%, 2014 at 1%
UK: 2012 at -0.25%, 2013 at 1%, 2014 at 2.2%
US: 2012 at 2%, 2013 at 2%, 2014 at 3%
At
first glance investment-auto-motives suggests that the IMF could be
latterly seen to be perhaps somewhat under and over optimistic
regards specific EU and EM countries. Germany’s ongoing strong
rebound should be supported by US and indeed reborn European demand,
especially so within Germany, so evening-out its almost total
reliance on emerging countries for its high-value industrial and
consumer exports since 2008.
France
looks unlikely to rebound so quickly to 1% by 2014, it perhaps hit
hardest by EU restructuring, caught directly within a distinct
‘value-chasm’ between an expectation of maintaining northern
European wage levels whilst combating new strides in southern
European competitiveness and productivity; thus having to direct a
medium route that could effectively see ongoing low level growth
rates below 1% for some years.
Spain’s
figures appear overtly optimistic, gaining from -1.75% to +1% in a
two year timeframe, a better approximation being at best a reaching
of 0% and so alleviation from painful economic contraction.
The
UK seems somewhat over-egged as well, with an expectation that at
best 1.75% (not 2.2%) will be reached in a steady manner, a better
long-term outcome than mid-term over expectation and failed delivery
so disturbing the City.
But
of vital importance is the view that the US data appears to reflect a
realistic outcome given the new era optimism seen both on Wall Street
and on Main Street.
Brazil:
2012 at 1.75%, 2013 at 3.75%, 2014 at 4.25%
China:
2012 at 7.75%, 2013 at 8%, 2014 at 8.25%India: 2012 at 5%, 2013 at 6%, 2014 at 6.25%
Russia: 2012 at 4%, 2013 at 4%, 2014 at 4%
It
is believed by investment-auto-motives that the Brazilian data seems
very optimistic given its now heavy reliance upon infrastructure
spending up to the 2016 Olympics and what appears a retrenchment in
consumer spending confidence, an important part of the previous
growth story. 2.5% in 2013 and 3.0 in 2014 believed a more realistic
outcome.
China
on first view looks right given its need for economic stabalisation
and a deflationary stance, but investment-auto-motives suspects that
the new incoming Party leader and Polit Bureau cabinet may seek an
even greater deflationary measured so as to slow internal rates of
wage increase, retail pricing and critically housing prices, for the
general betterment of the masses. This then equates to the slower
growth views of one well respected economist, possibly even toward a
‘lowly’5% growth rate, which then harmonises with global
conditions in the long run.
India’s
figures appear realistic given the need to re-charge the economy
after its painful slowdown from 8-9% over preceding years, having
seen partial re-configuration of industry and the general economy
toward a more globalised India in recent years
Russia’s
flat-line figures however appear harsh given the promise of a new
oil, gas and general commodities cycle directed toward the West as
part of its rebound. Whilst new coal, shale and gas extraction have
been headlines of late, the fact is that the immensity of Russian
export volumes and a probable reduction of Eastward consumption and
supply indicates a reduction in energy costs – seen in Oil Futures
– so assisting the EU recovery and perhaps a 5% Russian growth rate
by 2014].
The Investment Banking Arena -
The
following provides a snapshot of the general mood.
Concerns
-
“EU
contagion risk into global economy looks far reduced, ECB safety net,
OMT etc, improving realisation that economic fundamentals must be
re-arranged ”
Europe,
public fiscal consolidation and private sector deleverage creates a
deteriorated downward revision, OMT simply relieving immediate
pressure, continuing into 2013 and beyond requiring major structural
change within the EU economy.
US
income growth slowed, savings levels dropped from 5.5% to 3.4%, with
some retail consumption estimates seen as overtly high; consumers
with little additional disposable income to increase sales.
Cautious
Optimism -
“Base
case is that 2013 is better, deleveraged, banking sector aids
stronger macro-fundamentals”.
“Time
profile of growth looks different, weak early on in year relative to
US fiscal cliff, acceleration later as degree of fiscla drag
diminishes and healing of private sector comes into effect”.
“Oil
constraint on global growth has grown less tight, capacity growth
previous slow because of GDP demand growth, so easing of supply costs
of conventional and shale extraction bodes well
“We
do expect another relatively weak year for growth in the global
economy… (But) I think there are, underneath the surface, some
important reasons why 2013 might feel a little friendlier than 2012.”
“ In
our view, the key challenge facing the Euro Area authorities is to
exploit the collective strength of the countries, in order to
overcome the weaknesses of some parts of the Euro Area.”
“The
2008 crisis demonstrated that flows were going through ‘financial
pipes’ that were not harmonised, so creating a rapid repatriation
of money to the north. Public sector funds now replacing previous
private finance, via a central bank ‘hub and spoke’. However,
though risks to a structural Euro collapse have increased (if one
spoke breaks) expected that normalisation will resume as banking
sector is slowly re-strengthened and made healthy”.
Expectation
-
“Weak
year, just above 3% globally, potential rate is 4-4.5%, 2% in USA,
contraction in EU, 8% in China just like 2012”
-
Big picture risks reduced.
Triad Economies -
-
US loose monetery policy though much abated still continues,
assisting all.
-
UK leads Eurozone return to health, green shoots in banking sector- Confidence in equity markets as growth recovery solidfies.
- Bond markets stay in lowish levels but drift higher.
- Interest rates expected to slowly rise, per US housing recovery.
- But benign inflation expectations given spare industrial and labour capacity
- Oil at high levels but any further upward pricing contained.
- Dollar to weaken assisted by Fed.
- This off-set by ASEAN and EM currency strengthening.
- Equities valuations stable, “still priced for reasonable growth income”
- “Friendly asset market picture.”
- “See a 10% return in US equities for 2013”
EM Economies -
“Emerging
markets have a different picture, less spare capacity, pick up in
growth creates inflationary pressures and so rise interest rates
expected”.
Focus
on China:
-
Chinese growth at 8% / soft landing scenario. no major shocks
expected,
-
Cyclical issues muted by government action: $4trillion liquidity
injection vs fiscal tightening- But structural issues still remain: house price over-inflation, over-investment in supply-side, both requiring major adjustment.
- Medium term challenges: to rebalance growth from investment and exports toward internal consumption. Also to phase out government pricing structures on energy, to diminish the still powerful role of state owned enterprises so as to induce privatisation-led innovation and competition.
- Mass market Chinese consumers seen to be key to country’s healthy future, so creating an expanded internal demand, thus switched away from the core middle-class and high net worth aspirationals
- But lack of social “safety-nets”, the realistic attitudes towards healthcare costs and education costs, undermine a maximisation of mass-market consumer spending.
Pro-Western
Investment Attitude -
The
following provides the publicised investment perspective of one major
investment bank; this is provided by investment-auto-motives not as
recommendation (esp given its autos focus) but simply to provide one
'attitudinal overlay' born from the previous intelligence.
- Overweight
on : utilities, healthcare, technology : equities developed markets
(US, EU, Japan)
- Marketweight
on: energy, industrials, telecoms, staples : - Underweight on: decretionary, financials, materials : fixed income developed markets
“Improvement
in N. American manufacturing competitiveness, with significant
productivity gains seen in recent years relating to middle-value
goods, (ie without high labour content). Furthermore, the expected
reduced taxation benefits [accruing from a fiscal cliff deal] would
assist manufacturing sectors.
“Aggressive
monetary policy measures are reducing the systemic risks and ensuing
swings in investor positioning that have dominated markets since the
start of the great recession. So moving away from risk on/risk off.
However, significant fiscal tightening and associated business
uncertainty across the major developed economies, as well as
structural changes in Europe, will continue to hold back growth in
early 2013”.
General
Attitude -
“During
the past year, investor concern about systemic risks - from euro area
dissolution, to China's hard landing and a financial system collapse
- has faded considerably. This is leading asset prices to be driven
less by macro developments and more by asset-idiosyncratic
considerations as well as return-seeking flows into the next
not-too-risky asset class”.
However
“an inability to fully dispose of 'fiscal cliff' issues, will not
produce a comprehensive deficit reduction plan that would put the US
on a fiscally sustainable path and be constructive for markets and
growth”
“For
the first time since the crisis began, European policymakers have
managed to get one step ahead, with European governments and
institutions reconfirming their commitment to the Euro project and
beginning to put in place aggressive policy measures. While Euro
dissolution risks may well resurface down the road, they are not
likely to be significant over the next several months”
“The
yen to depreciate by as much as 10% in response to easier monetary
policy from the BoJ”
“China
has successfully adjusted to a lower trend growth rate, and
policymakers are driving a significant shift in income distribution
towards households and away from businesses. While this means China
will not play the same locomotive role globally, it will make Chinese
expansion more politically as well as economically sustainable and
the global economy less exciting but more stable.
“A
more limited scope for returns in emerging markets equities
generally, given limited prospects for growth acceleration (and for
western investors) the issue of FX appreciation
Conclusion
-
Though
investment-auto-motives does not shy away from being contrarian where
necessary, so as to present a more insightful interpretation, the
present state of global economic affairs, given what has been a
troubled long-haul since 2008, does indeed to offer very real green
shoots of confidence.
Confidence
for the benefit of forward-thinking, powerful regional and global
investors, who themselves recognise the re-orientation of the
international investment landscape; one which for the first time in a
long time, favours the West and general Triad region, having seen a
massive deflationary effect in the US , Europe and still ongoing in
Japan, the 'bottoming-up' process now under-way.
An
overall picture in which the West (Triad) becomes avowed to act as a
‘starter-motor’ for supply-side economics (acting in a similar
manner to China over the previous 15 years) within which investors
become the arbitors of renewed socio-economic improvement. This
achieved through a new belief in those large cap multi-national
companies, national SMEs and local start-ups which are seen to be
well positioned. Those best placed, to not only draw conventionally
from B2B and B2C product and service markets, with well aligned and
improved offerings, but also able to recognise the importance of
creating their own internally synergistic internal and locally
external ‘mini-economies’(similar to Indian conglomerates). So
able to intelligently combine both profit-seeking shareholder
interests and the social cohesion of employees and their immediate
locale.
EM
nations – many beyond that possibly patronising name - continue to
ride the economic miracle experienced in the West during the 20th
century. The BRICs and CIVETS having formed close economic ties,
possibly at the increasing expense of relations with notionally
‘advanced nations’. The first decade of this century questioned
whether EM nations had indeed de-coupled from advanced nations, their
ability to withstand the 2008 crisis, the creation of 'detached
policy' unquestionably demonstrating their new standing.
This
new EM-centricism perhaps best exemplified by China’s recognition
that it must maintain its own economic success by (re)turning inward
to better economically serve its massive 1.6bn populace. As its ASEAN
and EM counterparts climb the value-curve in products and services so
China will continue to increasingly 'de-couple' through absorbed
technological, capital markets and sociological learning. But
expected to keep close relations with a chosen few triad nations who
are truly advanced; so re-creating the Western miracle in its own
image. Rabid supply-side over-investment leaving state-backed
companies overtly 'fat', and the immature financial pipelines giving
a large shadow-banking problem (with increased corporate bond
defaults) are being learned. Hence a new era of muted structural
change under new conservative leadership of Xi Jinping to appear in
the mid-term directed at improving the wealth of the masses.
But
such a monumental shift in the fundamental wealth creation model,
whilst very good news for continued privatisation and the capitalist
ethic, is bound to reduce the momentum of the Chinese economy (and
possibly dependent ASEAN counterparts) from the heady 9-10% of
yesteryear, with even 8% appearing over optimistic; 5% to 6.5%
perhaps a more realistic expection.
This
infers then that a notionally de-coupled global economy may well over
the next decade stay that way, resulting in relatively more regional
econo-centricism as the global tribes seek to secure their own place
in the world once again by re-strengthening their own nations and
regions, a large proportion of investment liquidity flowing
'internally', and the levels of foreign direct investment buoyed more
so from the QE effect rather than old style outward bound
opportunism.
Here and now 2013 appears far better prospect than at any time over the last 5 years, easily said, but investment attitudes truly appear to be switching from a 'binary' risk-on/risk-off, to something far more intelligent that allows the practice of logical investing to once again reign.
However, the expected heavier retraction in China will give cause for greater focus on Western macro and micro fundamentals...and about time too!
