Note March 5,2019: Market Probing Forays, Likely Nothing More – Even as much is being made about the equity market recovery from the lows of late 2018, we see the more recent and volatile to-and-fro activity as being probing forays, likely nothing more. The Federal Reserve has announced a hiatus in rate increases as well as in balance sheet reduction. Similarly and rather than using constructive ambiguity, other major central banks from the European Central Bank to the Peoples’ Bank of China appear with mixed messages.
Global growth has appeared to be slowing towards a 3½ – 4% annual GDP rate. In Europe, growth has been slow and in some cases flirting with recession. The U.S. State of the Union centered on patriotism but less so on vision about infrastructure while tax cut stimulus of 2018 is now done and trillion dollar deficits appear for years to come. Much business aspiration has been on China. The early March 2019 Chinese National People’s Congress opening addresses notably appeared pointing to GDP growth slowing to the 6 – 6 ½ % annually and on listing the many aspects needing handling, from rural areas to unemployment to defense to monetary reserves. One challenge for China today seems avoiding mistakes of tapping cheap credit in excessively building infrastructure of limited utility as happened in Japan in the 1990s and Spain in the 2000s.
Even with a decade of massive global quantitative ease, the key Financials sector seems unsettled worldwide from advanced areas like Germany to emerging ones like India. From consumer discretionary to staples alike, companies report revising production and sales logistics. In emerging economies like China, aspirational consumers may be moving to espouse quality and taste over paying up for global brand recognition while in Europe and the United States, consumer demand seems fickle, despite low rates.
In the capital markets appear sharp swings from long standing momentum espousing quantitative ease dependence. Sharp punishment appears at the individual security level for shortfalls, especially for restructuring laggards and irrespective of sector or geography. We favor selectivity for quality and diversification.
One of the dominant aspects in the current capital markets has been first in 2009, the initiation and then the continuation of massive quantitative ease by the central banks, led by the Federal Reserve as well as matched by several others. However, from the clarity of its purpose to de-clog credit markets enunciated at commencement and then into “do what it takes” types of commentary into 2012 to shore up asset prices, more recent central bank commentary appears slipping into confusion rather than constructive ambiguity. It can be ascertained most clearly in the sequences of commentaries emerging after successive Federal Reserve Open Market Committee meetings. Initially, minimalist administered rates and massive expansion in central bank balance sheets were introduced with much fanfare as new tools in central bank policies. Capital markets responded with increased focus on central bank policy externally and on momentum driven activity internally. Then and especially from late 2017/2018 overall, a form of constructive ambiguity appeared to emerge. Particularly from the Federal Reserve there was both the announcing of a sequence of Fed Funds rate increases and balance sheet reductions as well as the professing of being data driven. Constructive ambiguity has long had a key role in the armory of central banks and more could have been the next logical step. However, we would put recent comments into the confused category. The Federal Reserve has announced a hiatus in further rate increases as well as in balance sheet reduction but with little light being shed on the evolution of future policy. Rather than moving further up on constructive ambiguity, other major central banks ranged from the European Central Bank in advanced economies to the Peoples’ Bank of China in emerging countries have become similarly appearing to be with mixed messages.
It does appear to be that global growth has been slowing towards a 3½ – 4% annual GDP rate. In Europe, growth has been slow and in some cases flirting with recession with area wide elections being due alongside other potential policy rending events like Brexit, Italian deficits, French yellow jacket rioting over opportunity and the end of a political era that is imminent in Germany. While the U.S. State of the Union was finally held with much fanfare that centered on patriotism but was less so on vision about infrastructure for example. The boosts from U.S. tax cuts of 2018 are now done and as the Congressional Budget Office has pointed out, the risks appear real of trillion dollar deficits for years to come.
Much aspirations worldwide for business have been about China. At the Chinese National People’s Congress being held in early March 2019, opening addresses appeared to be notable in both pointing out that growth in China could be slowing to 6 – 6 ½ % annually in GDP. As well, much emphasis was placed on highlighting the many aspects that needed to be handled. They ranged from rural areas to infrastructure to domestic consumption to unemployment to defense to even monetary reserves. It seems to us that a key challenge for China today is to not repeat the mistakes such as of Japan in the 1990s and Spain in the 2000s of tapping cheap credit in excessively building infrastructure of limited near term utility.
Meanwhile and even a decade after the commencement of massive global quantitative ease, structures seem far from settled in the key Financials sector worldwide from advanced areas like Germany to emerging ones like India. Recent events in the key consumer sector have demonstrated that in emerging economies like China, aspirational consumers may be moving in a very normal progression of now being confident enough to espouse quality and taste after initially having been willing as new global consumers to pay up for global brand recognition. In advanced economies such as in Europe and the United States, consumer demand has appeared fickle, despite low rates. From consumer discretionary to staples alike, companies report having had to re-evaluate production and sales logistics.
In the capital markets themselves, we see sharp swings from long standing momentum espousing quantitative ease dependence. There appears sharp punishment at the individual security level for shortfalls, especially those related to being laggards in restructuring amid low interest ratesand irrespective of sector or geography. We see diversification and focus on selectivity as well as quality as being called for. StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e.