Global Overview April 14, 2016
After struggling for most of President Obama’s two term presidency, the US economy has found its footing – albeit an anemic one – after such a long struggle. So therefore, in a global context this is truly a case of, “In the land of the blind, the one-eyed man is king.” However, many issues still confront the US economy, especially during this presidential election year. Clearly, Chairperson Yellen has been caught in a bind. With perfect 20/20 hindsight she should have pulled the trigger on normalizing interest rates much earlier in 2015. Nevertheless, there were numerous reasons as to why she did not. Uncertainties about the US economy prevailed until December of last year when she finally pulled the trigger and implemented a strategy to normalize interest rates. Whether this was too early or too late she now has to publicly scale back the four rate hikes for 2016.
During last year, whenever she or a governor of the Fed gave an opinion about a possible rate hike, markets went down decisively for an extended period of time. There was no way that the Fed could have misinterpreted the negative reaction of the marketplace to a rate hike. Now a rate hike is further complicated by the fact that it will take place during a presidential election year.
On the political front, the Democrats have a 74 year old self-espoused socialist who honeymooned in Moscow, giving Hillary Clinton a run for her life for what otherwise would have been a coronation. On the other side with the Republicans, the leading candidate is someone who is disliked by the majority in his party. The stage is set for a most raucous presidential election campaign. The results of this election are even more significant due to the extreme contrast in policies when either one of them occupies the White House next year. The impact on financial markets will likely be difficult to contemplate. The bottom line is that there are too many balls in the air for anyone to make a realistic call on financial markets beyond 2016.
Since last summer, global economies and financial markets have been embroiled in a continuous series of turmoil. The key element has been attributed to uncertainties about the Chinese economy and the subsequent collapse of the Chinese stock markets initially back in July and the second wave literally at the beginning of this year.
Being the second largest global economy and by definition a major procurer of most commodities and other resources on a global basis, it was almost a knee jerk reaction that the economies of almost all commodity producers have been negatively impacted by the slowdown of the Chinese economy.
Forecasts of doomsday scenarios, especially about China, quickly followed. Nevertheless, the Chinese continued to play hardball. They have repeatedly injected stimuli into their economic system. As much as the positive results so far have been anemic, they have strongly indicated their determination to stabilize and grow the Chinese economy going forward.
In addition, the much feared Chinese devaluation of the yuan has not materialized. In part, Chairperson Yellen’s recent announcement about the scaling back of the four Fed rate hikes in 2016 has not only contained the fears about Chinese intentions and the outlook on their currency, but also calmed stormy waters, especially in emerging economies.
As for China, there are some early signs of green shoots sprouting. However, on a seasonal basis, post lunar New Year, comparisons are always very tricky. Nevertheless, comparisons do get easier with the base effect coming into play since China’s economic activities were particularly weak in the 2nd half of last year.
Furthermore, good or bad, the Chinese authorities have made a sustained effort to also stabilize financial markets. In this instance, we believe that it is very hard for market participants to bet against the central bank. In addition, it is important to remember that as a class, Chinese securities are very much under-owned by global investors.
So we are therefore quite constructive about China/Hong Kong shares. We believe that there is a great likelihood that the balance of 2016 may very likely turn out to be a mirror image of the first quarter and end the year resoundingly higher.
The stall of the Japanese economy has not come as too much of a surprise to us. The structural issues which are mostly negative, have been of supreme importance. It is virtually impossible to overcome the realities of an aging population and a shrinkage in the workforce. Older folks are much more inclined to be savers rather than spenders. In Japan, a tradition bound country, there are other cultural issues that are inviolate. There lie the challenges for Abenomics. Recently, the Bank of Japan mandated a scenario of negative interest rates. Not only is this an extreme form of punishment for savers, but implicitly the Japanese central bank has announced to the world that all of its rabbits are out of the hat and there are no more tricks to spring on its audience. One wonders what other measures are available if negative rates don’t work their magic. Can Japanese authorities contemplate additional measures of confiscation?
Unfortunately, Chairman Draghi at the European Central Bank is traveling down the same road. Europe’s economic problems are much further complicated by the economic/political problems of the massive influx of refugees from the Middle East. As if things are not complicated enough, Europe has to also confront the major internal issue called Brexit.
We are aware that financial markets have a funny way of rationalizing events. To a large extent short term market direction is dictated by investors who are either long or short at that time. Therefore there may likely be intermittent rallies. Nevertheless, we cannot see how investors can be overly optimistic on a longer term fundamental basis.