Uncertainty for global investors
0The Airline industry’s freight volume data suggest that March was a very poor month with volumes down by over a percentage point. By region, Asian freight trends were notably soft, Latin America weakened significantly, and US trends remained essentially lacklustre. Unsurprisingly, Europe was very weak but Africa and the Middle East are continuing to report some modest growth. Elsewhere, the Dutch CPB organisation reported that total world trade volume growth slipped below 2%yoy in February/March for effectively the first time since 2009. These data suggest that global trade growth largely ceased two years ago, broadly consistent with the numbers available for individual countries.
Meanwhile, monthly world trade price data and trends reveal an equally worrying situation. US import prices are now falling in US dollar terms and the rate of dollar denominated export price deflation has picked up in Korea, Singapore and Japan over recent weeks. China’s rate of export price deflation has eased slightly in US dollar terms as the RMB has appreciated (but increased in domestic currency terms) while ASEAN trends remained relatively bright by global standards.
Overall, it is difficult to escape the fact that world trade price and volume trends are far from bright at present and this may end up constraining the apparently now widely expected equity market rotation back into Emerging Markets.
In terms of what the world trade price situation really means, it is notably deflationary – and this is consistent with a host of countries from the UK to New Zealand revising down their inflation forecasts, and one of the reasons why the overall US CPI index has been unchanged from September 2012. In fact, we would argue that world trade prices are currently exhibiting the type of behaviour that has previously been associated with global deflation scares over recent years. Despite all the central banks’ money printing activities, deflationary forces remain prevalent in world trade it seems and the recent weakness in the Yen, coupled with events in Europe, will not be helping this situation.
As part of the picture, we have the dire Euroland GDP advance estimates. French, Italian and Spanish GDP continued to fall in Q1 and this is simply a shocking state of affairs. It should be remembered that the ECB was actively planning to raise interest rates while this contraction was occurring and more importantly we should also note that the Euroland credit situation has got worse rather than better since then. Europe seems set to remain a deflationary force within the global economy.
Turning to the US, the latest retail sales figures were certainly not strong (although core sales ex gasoline actually rose slightly) and clearly the data is now tracking along a slightly lower trend level than it was in 2011. It looks as if a combination of weak disposable income trends and a continuing diversion of household cash flow into the housing market are detracting from the amount of cash flow available for consumption – hence the seemingly more subdued level of retail spending. In practice, having shifted downward to a lower level in early 2012 when the housing market first started to ‘recover’ (in so doing, the housing market in effect absorbed cash flow from households that might otherwise have been available for retail sector spending), US nominal retail sales growth (which the markets tend to focus on rather than the absolute level of sales) is now once again continuing to expand at a nominal rate of around 4%, which given the low inflation environment is not too bad by global standards (in fact, it beats many EM!), Somewhat against the odds, the US consumer remains relatively bright spot in the global economy.
So where does that leave equities? Through their purchases of bonds and incessant attempted creation of liquidity, central banks have tried to push equity risk premia towards zero. However, with Europe, apparently Japan, and of course most world trade indicators still signalling a threat from deflation, markets may come to doubt central banks’ effectiveness and therefore begin to move premia back up. Loss of confidence in central bankers may not be a risk much before the end of Q3, but the prudent investor will stick to quality and high free cash flow yield in the face of such significant risk.
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
