Developed Economies Lead Slow Global Recovery
By Percival Stanion, Chairman, Strategic Policy Group
Baring Asset Management (Barings), London
(Barings is the Subadviser to the ASTON/Barings International Fund)
We did not adjust our macroeconomic assessment of developed economies in July. Data releases have been mixed the past few weeks, but nothing seriously disturbed the trend of slow growth in the U.S., moderate recovery in Japan and the UK, and a flattening of activity in Europe. We did downgrade the outlook for growth in the emerging economies of China, India, and Eastern Europe, however, having already previously downgraded Latin America.
The reason behind this move is simply that data in the emerging area has been weak. China’s headline purchasing manager index slipped back to less than 50—indicating a decline in overall activity—and the government is finding itself forced to defend its totemic 7.5% growth rate. This despite anecdotal evidence suggesting that economic activity on the ground is in fact much weaker.
We expect the recent move by the Chinese central bank to engineer a very tight funding squeeze on the banking system, coupled with the latest announcement of an audit of all local authority debt, to have a significant chilling effect on major investment projects. In our view, this will not be sufficiently offset by the recently announced help for small business, while there will be little stimulus from overseas given the sluggish nature of global growth.
It must be said that we do not think that economic growth in China is collapsing in the same way it did post-Lehmann, but this very fact probably gives the Chinese authorities confidence that they should bear the economic pain of tackling structural issues now. Having said that, the authorities are taking steps to avoid panicking markets and will probably reverse course if things get really weak, but for now that is not the central scenario.
Similar factors apply to other large emerging economies. In India, its current account balance has turned sharply negative and major infrastructure and reform projects have stalled ahead of next year’s elections. A major food subsidy program will also likely affect government accounts negatively. Meanwhile, in Brazil, the rounds of street protests against corruption and transport costs have led to more concessions from the government. We expect similar action in Turkey following recent unrest there.
Overall, the emerging complex is fraught with internal reform issues in the short-term, with little external stimulus. We still believe in the long-term growth story of Emerging Markets, but reforms are needed in several countries before investors are likely to warm to the area once again.
On a sector level, we have upgraded Energy to a neutral score. Like the Materials sector, another candidate for a potential upgrade, Energy has significantly underperformed other sectors in recent times. We believe the attributes of major Energy firms look better than global mining companies, however, with a higher return-on-equity and a more positive outlook for oil prices compared to metals.
We downgraded Consumer Staples from neutral to an underweight. This is due to what we see as an increasing number of Consumer Staples firms issuing disappointing earnings announcements, many of which are linked to slower Emerging Market growth. Stock valuations also appear high, in our view. We also downgraded Technology due to the sluggish outlook for capital spending.
Elsewhere, we’re viewing currencies cautiously as we downgraded all emerging currencies and gold to an underweight score versus the US dollar. We believe capital flight from Emerging Markets is likely to intensify amid social unrest, and that governments will likely encourage some devaluation to help stimulate exports amid a sluggish growth environment.
The information contained in this article is provided by Baring Asset Management (“Barings”), a subadviser engaged by Aston Asset Management, LP (“Aston”). Barings is not an affiliate of Aston and their views do not necessarily reflect those of Aston.
This material is not intended to be a forecast of future events, does not constitute investment advice, and is not intended as a recommendation to buy or sell any security. Investors should consult their investment professional regarding their individual investment program. Since the date of this report, economic factors, market conditions and Barings’ views of the prospects of any particular investment may have changed. Investors should consider the investment objectives, risks and associated costs carefully before investing. Forward-looking information is subject to certain risk, trends, and uncertainties that could cause actual results to differ materially from those predicted. Past performance is no guarantee of future results.