James Bevan: Signs of global growth point to better equity markets
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James Bevan
For some the global economy, excluding the US, has been insipid, but there are signs of improvement in the offing.
1) Commodity prices remain firm. Besides oil prices, other commodity prices also dropped sharply from the summer of 2014 through late 2015, triggering fears of a global recession. The CRB raw industrials spot price index fell 27.0% from 24th April 2014 to last year’s low on 23rd November. But it is up 15.5% since then through Friday. We can expect the index to move sideways for a while, though it’s looking perky again.
2) PMIs are looking up. Last Friday, Markit reported a slew of PMIs for the US, Euroland, and Japan. The M-PMI for the US rose from 51.3 in June to 52.9 this month, and that’s the best reading since October 2015 and the sharpest increase since August 2014, and is particularly impressive given the strength of the dollar.
The Euroland composite PMI has held up reasonably well despite the Brexit shocker at the end of June. It edged down from 53.1 last month to 52.9 this month. Interestingly, Germany and France were relatively solid, while the rest of the region was weak. Here is Markit’s wrap-up on the two countries:
“In Germany, companies reported the fastest rate of output growth so far this year, driving one of the largest increases in employment seen over the past five years. Services growth revived from June’s 13-month low and factories reported the largest improvement in production since April 2014.”
“In France, business activity stabilised after falling fractionally in June, buoyed by a marginal return to growth in services and an easing in the rate of decline in manufacturing.”
Japan’s M-PMI has remained below 50.0 for the fifth consecutive month. However, it has increased over the past two months through July from a low of 47.7 to 49.0.
Germany’s Ifo business confidence index for July edged down slightly following a solid gain in June, confirming that Brexit didn’t have an immediate impact on Germany.
3) Emerging markets may be re-emerging. There are some signs of life in the industrial production measures of emerging market economies (EMs). Over the past 12 months through May, global industrial production was up just 2.0%. Interestingly, it was down 0.1% for advanced economies but up 4.2% for the EMs, from a recent low of 2.2% at the end of last year and this is the best growth rate in 17 months.
Leading the way with solid gains at or near record highs were Indonesia (up 7.1% year on year through May), China (6.1% through June), Poland (6.0% through June), and Malaysia (2.6% through May). Production levels in India are relatively flat with a year ago, but up 4.0% from last year’s low in November through May. Output levels in Singapore, South Korea, and Taiwan all remain stalled at their record highs since 2012-2013; Singapore’s production is up 12.1% year to date through May; Taiwan’s output is up 3.2% over the past four months through June. Even Brazil’s production has edged up over the past three months through May, although it remains down 14.5% from two years ago.
Better growth, low inflation and low yields argue for better equity markets.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
*CCLA is a supporter of Room151
