Global Macro Strategy
February 9, 2016
Peter Donisanu Global Research Analyst
Analysis and outlook for the global economy
- On Friday, an advance reading on fourth-quarter economic growth in the Eurozone will be reported.
- We expect this growth data to be in line with expectations given positive surprises in France and Spain.
What it may mean for investors
- Financial market reaction to a positive report on Friday is likely to be muted given broader global growth concerns.
- While we expect a positive print on gross domestic product (GDP), we believe that this week’s report could surprise to the downside, which could aggravate growth concerns and push investors further into risk-off mode.
Eurozone GDP Report—What We Are Watching
On Friday, market participants and Eurozone-watchers will be presented with an advance reading on fourth-quarter GDP growth for the currency bloc. We anticipate this week’s figure to reflect a positive trend for the quarter and year, but also anticipate the potential for a year-end, trade-related disappointment. Overall market action continues to reinforce our view that economic activity across the Eurozone is maintaining a relatively strong growth momentum, which reinforces our overweight recommendation for international developed market stocks and European equities in particular.
Indicators Still Point to Growth Recovery
Two key factors support our view that Friday’s fourth quarter print likely will be in line with expected growth of around 1.5 percent. First, a number of countries in the Eurozone have already reported fourth quarter GDP figures, including two of the region’s largest economies—France and Spain.
Chart 1. Fourth Quarter 2015 GDP Reports for France and Spain Beat Expectations
Wells Fargo Investment Institute, Bloomberg; 1/7/16
In January, it was reported that France’s economy expanded by 1.3 percent year-over-year in the fourth quarter. On a quarterly basis, its expansion was slightly slower than in the third quarter. This was likely due to softer household consumption stemming from last year’s terrorist attacks. Nevertheless, business investment—a key leading indicator of sustainable growth— expanded at its fastest pace in four years. In Spain, quarter-to-quarter economic activity maintained a relatively strong growth momentum in the fourth quarter, expanding at a nine-year high of 3.5 percent.
Second, as we pointed out in a recent report , several indicators that we follow are pointing to broadly positive trends in household consumption and future-spending expectations across the Eurozone. A decade’s high rate of retail sales growth was likely supported by rising consumer confidence as the rate of unemployment fell to a 30-month low. Recent surveys of bank lending to households and businesses alike showed accelerating demand for credit in the fourth quarter. It is likely that this increase in credit demand comes at a time when households and businesses have gained enough confidence in future economic prospects to make sizable expenditures—including purchasing new cars and homes and expanding business operations.
We anticipate that Friday’s GDP report will be in line with expectations and will support our constructive view of the Eurozone as an investment destination. Yet we expect the near-term market reaction to be muted as broader global-growth concerns linger. It is also possible that Friday’s report could surprise to the downside by reflecting softer activity in Germany’s economy. Germany’s fourth-quarter retail sales, industrial production and trade data disappointed, but we believe that these factors are partly reflective of Germany’s later stage in the economic recovery cycle —coupled with headwinds in emerging-market-related trade. This week’s report will nevertheless provide us with a headline reading on growth ahead of a detailed expenditure-level report to be released on March 8.
While the level of global economic growth in 2015 and 2016 could be lower than we had expected, we anticipate that the overall trend toward recovery will accelerate. As economic releases in coming months reflect this view, positive data, coupled with easy global monetary conditions, should boost financial-market risk appetite, supporting our bias toward stocks over bonds and our preference for risk assets where economic momentum is strongest. We continue to expect momentum to be strongest in the U.S. and Europe and suggest that investors consider overweighting developed-market equities broadly and European equities in particular. That said, a disappointing reading on Eurozone GDP Friday could lead to a renewed spate of risk-off activity, leading us to reevaluate our favorable view toward European equities.
Given the ongoing growth concerns surrounding emerging markets, we maintain an underweight recommendation for emerging-market equities and advise investors to hold 100-percent, dollar-denominated debt in emerging markets. For international developed-market bonds, we prefer 50-percent dollar-hedged strategies in an effort to protect against the possibility of further dollar strength. We expect the dollar’s recent moderation to give way to strength—potentially putting downward pressure on developed-market currencies, particularly the euro and yen, and detracting from repatriated fixed income returns.
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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