US economic data are perplexing at the moment. Over the past year, the number of jobs and wages have been growing well, yet retail spending absolutely dived in December. Added to that, despite this booming labour market, more than seven million Americans are at least three months late on their car repayments. That’s the highest number since the global financial crisis. PMI business surveys – a mix of emotional data like confidence about the future and hard numbers such as upcoming orders – are simultaneously hot and not, depending on which part of the economy you look at.
It’s a headscratcher for sure. The longest government shutdown in history wouldn’t have helped the average Joe’s outlook. And an unexpected consequence of last year’s US tax cuts means millions of people will end the year with a bill rather than the usual income tax refund.
Still, to us, these numbers don’t paint a picture of imminent recession. The US has been growing steadily and its households are getting wealthier. There are areas of hardship and concern – some farms and businesses are no doubt suffering from the trade tangle with China – but these are isolated.
In the case of American soybean growers, Uncle Sam has splashed the cash to support them as their crops rot in the fields. This isn’t the best trade policy, but it does suggest that the US government intends to come to an agreement with China – and soon. Otherwise it may be doling out billions of dollars worth of corporate food stamps for the next two years at least (good luck winning an election if you leave farmers in the lurch).
As for the rest of the world, well… it’s not great, but we think it’s not as dire as some would have you believe. As expected, Chinese growth is slowing, from 10 per cent in 2010 to just more than 6.5 per cent in 2018. This was always going to happen as the country grew to become a much larger share of the global economy. The drop in Chinese demand for everything from metal and food to cars and industrial machines is hurting its largest trading partners. Again, nothing too surprising.
One of these large suppliers, Europe, had problems already. Many, many times we’ve gone over how we see the EU as flawed and fundamentally difficult to invest in. Italy is a particular area of suspicion for us. This debt-bomb of a country is bigger than you think, with the ability to upend the European debt market if it goes off. A tenth of the loans made by Italian banks have gone bad, according to the European Central Bank. Even worse is the absolute total of Italy’s bad debts: at €159 billion it is easily the highest of any country in the bloc. Suffice to say, we have found better places to put money to work.
Brexit tumbles ever onward. As we suspected, the sheer complexity and divisiveness of the issue has led politicians to keep delaying and obfuscating, creating a never-ending Brexit, if you will. That is no good for the UK, which will probably continue to leak capital like a broken bucket. Hopefully a compromise and a plan for the next decade can be reached soon; the country definitely needs it.
Global trade winds will continue to blow the way of US-China trade talks, while in the UK improved market weather will depend on some form of progress on Brexit negotiations. We’re not expecting the world to fall into recession this year – it would take a large swing in several economies that just doesn’t look likely as things stand. Still, global growth is slowing down as the US comes off its tax-cut-fuelled peak and China struggles with over-indebtedness and export barriers. Because of this, we’re trying to stay as vigilant as possible, trying to take notice of the real issues in a world awash with information and emotion.
So, lots of uncertainty out there? You bet. But that’s nothing new. We are actually quite optimistic at the moment. The world isn’t perfect; it never is. But that isn’t what matters. What matters is how investors see the world – banally, we measure that by asset prices – and whether that matches up to the likely reality. Right now, investors appear much more concerned than they should be: most assets are looking modestly priced. No bubbles are inflating that we can see; instead the global economy has been ticking over reasonably well as investors increasingly panic at the first sign of bad news.
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