Global Macro Strategy
August 24, 2015
Paul Christopher, CFA®, Head Global Market Strategist
Peter Donisanu, Global Research Analyst
Analysis and outlook for the global economy
- Last week’s bearish market sentiment carried into Monday’s trading as global risk assets sold off sharply, leading to multi-year declines across global financial markets.
- A variety of U.S. and international economic data show the global economic outlook is stable and may be likely to improve in the second half, led by the U.S. economy.
What it may mean for investors
- As growth improves and low commodity prices help to anchor low inflation, we believe we should see equities recover and bond yields rise. We believe investors should continue to favor global equities over global bonds.
China-Related Growth Concerns Appear Overdone
Last week’s bearish market sentiment carried into Monday’s trading as global risk assets sold off sharply. Global equity market prices closed approximately four percent lower in Asian and European trading, and this theme carried into the U.S. market open. Further, some bonds yields, including U.S. Treasury securities, have moved lower as demand for perceived safe-haven assets increased. These asset price movements coincide with building uncertainty around the potential for a China-induced global economic slowdown ahead of a Federal Reserve (Fed) rate hike. We believe that global economic growth will improve in the second half of this year, led by the U.S. economy. As growth improves and low commodity prices help to anchor low inflation, we should see equities recover and bond yields rise.
China worries seem overdone
China’s currency devaluation, the fall in oil prices, and a mid-year soft spot in global manufacturing activity—all coming just before the Fed may raise rates—have created a bearish sentiment around the potential for an economic growth slowdown and threat of global deflation. This, in turn, has led to increased market uncertainty. However, we do not believe China’s currency devaluation signals an accelerating weakening in the Chinese economy. Recent manufacturing data point to contraction in that sector, but Chinese consumer, lending, and housing data remain solidly positive.
China’s currency devaluation has coincided with broad weakness across risk markets, but we believe it is unlikely that China will become a threat to global economic growth. China’s economy is slowing, but that slowdown is the goal of the government’s reform programs. Instead, China’s government is probably using the yuan devaluation to provide more liquidity to the economy and to prepare China’s currency for its bid to be included in the International Monetary Fund’s Special Drawing Rights basket of international reserve currencies.
Looking forward, while headline attention has been focused on China’s manufacturing sector, we view the services sector as the likely linchpin holding together a near-seven-percent economic growth figure this year. Growth in construction and manufacturing sectors of the Chinese economy has decelerated in recent years and has taken a backseat to growth in services, an expected outcome as Beijing pivots China’s economy toward a consumption and service-based economy.
However, if China’s economy does begin to decelerate faster, the government has strong stimulus tools available to stabilize economic growth. In fact, as a precautionary measure, Beijing has spent much of the last year increasing the flow of loans to households and businesses. Fortunately, there are signs that China’s economy is already responding to recent stimulus, especially the real estate market, where prices are recovering. Changes in China’s money supply indicate that the stimulus is taking effect and, as the effects develop further, we expect domestic consumption to reinforce China’s economy.
Global industrial production is turning higher, especially in the U.S., Europe and Japan. Exports to China from the U.S., Japan and the European Union had all increased on a year-over-year basis as of June, pointing to buoyant global demand for manufacturing goods despite commodity price weakness. Sentiment is still shaky in some commodity-oriented economies—such as Brazil and Russia—but easing monetary policy around the world is becoming increasingly widespread and could help to counterbalance the end of the Fed’s monetary stimulus.
Investors should remember that short-term pullbacks are frequent occurrences in markets. What matters is whether the U.S. and global economic expansions can continue. We believe that global economic growth will improve in the second half, led by the U.S. economy. Investors who focus on the continuing long-term economic growth, and stick with their investment plans, should benefit when sentiment returns to focus on this positive backdrop.
As growth improves and low commodity prices help to anchor low inflation, we should see equities recover and bond yields rise. We believe investors should continue to favor global equities over global bonds.
In terms of equity markets, we also prefer the U.S. first, Europe and Japan second, and emerging markets a distant third. In terms of sectors, we continue to prefer those most closely tied to the economic recovery and manufacturing momentum (Consumer Discretionary, Information Technology, and Industrials) and would advise against excessive exposure to those most vulnerable to rising rates (Utilities).
Paul Christopher is the head of international strategy and the co-head of real asset strategy for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.
Mr. Christopher focuses on the international economic outlook and offers investment advice on currencies and commodities. He is frequently quoted in the national media, including The Wall Street Journal, The New York Times, Forbes, Time, Investor's Business Daily, USA Today, Bloomberg News, ABC News, NBC News, and CNBC.
Prior to joining Wells Fargo, he developed economic strategies to trade in global financial and commodity futures markets for Eclipse Capital Management. In previous positions, Mr. Christopher supplied international economic perspectives for Wells Fargo predecessor A.G. Edwards, and advised institutional clients of Istanbul-based Global Securities on the oil-based economies of the Caucasus and Central Asia. He has consulted with the governments of Hong Kong, Egypt, Russia, Kazakhstan, and the Kyrgyz Republic on monetary policy issues.
Peter Donisanu is a global research analyst for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo's Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.
In his current role, Mr. Donisanu is responsible for building a broad, multi-asset-class strategy view for international developed and emerging markets and communicating these strategic views through client-facing and internal publications. He has been with Wells Fargo for 13 years and has served in a variety of consulting, financial management, and analytical roles.
Mr. Donisanu earned a Bachelor of Science in Business from ITT Technical Institute and a Masters of Business Administration with an emphasis in Finance from City University of Seattle. He is located in San Francisco.
*As of Sept. 30, 2014
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