The last week’s market highlights:
Quote of the week:
“Weekends don’t count unless you spend them doing something completely pointless.”
– Bill Watterson
– Bill Watterson
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 4Q 2019 Outlook :
- U.S. economy: Still seeing signs of growth
- Global economy: Downward pressure but no recession.
- Policy watch: Markets expect more easing
- Fixed income: Opt for high quality, longer maturity
- Equities: Get defensive, stay invested
- Asset allocation: While cautious, still prefer emerging-market bonds
Global Economy: A downgrade—but not an SOS—from the IMF
Starting a new job is never easy, which is why many fresh recruits are entitled to “ride the learning curve” as they become acclimated. But Kristalina Georgieva, who replaced Christine Lagarde as managing director of the International Monetary Fund (IMF) on October 1, had to get up to speed…and fast. She’s not single-handedly responsible for ensuring the health of the global economy, of course, but the IMF faces challenging times.
Late last week, China reported that its economy grew just 6% (annualized) in the third quarter, its worst showing since data became available in 1992.5 While retail sales and industrial production provided a September boost, exports declined for the period under the weight of the trade war with the U.S., and foreign companies reconsidered plans to invest in new plants and equipment.
China’s disappointing GDP release came on the heels of the IMF’s projection that the global economy will grow just 3% in 2019. That would be the slowest pace since the 2008-9 global financial crisis and down from April’s 3.3% forecast.
The primary culprits behind the IMF’s dimmer outlook? A sharp drop in global manufacturing and trade, driven by a number of factors. Chief among them are stiffer tariffs and “prolonged uncertainty” surrounding trade policy. Both have hurt investment and demand for capital goods, which are heavily traded. The IMF also pointed out that the auto industry is contracting under the weight of “idiosyncratic shocks” fueled by new emission standards in the eurozone, a major auto exporter. Failure to meet these new rules could cost the region’s carmakers as much as €30 billion, according to some estimates.6 In the face of these headwinds, global trade volume grew just 1% in the first half of the year, the weakest level since 2012.7
The IMF noted that aggressive monetary policy should help offset most of the trade-induced slowdown in 2019 and 2020. Absent such central bank activity, global growth would be 0.5% lower. At the same time, central banks may have “limited ammunition” left should the need arise for further stimulus.
The IMF’s latest forecast has some relative bright spots, though. Global GDP is expected to improve by 0.4%, to 3.4%, in 2020, even as the U.S. and China decelerate by a combined 0.3%. The IMF believes that pickup will come from (1) rebounds in countries where growth slowed significantly in 2019 compared to 2018, such as Brazil, Mexico, India, Russia and Saudi Arabia; and (2) recoveries or shallower recessions in Turkey, Argentina and Iran.
Although the numbers may add up for the IMF, we’re skeptical that modestly accelerating growth in these countries—nearly all of which fail to crack the “Top-10” list of the world’s biggest economies—can more than offset the anticipated downshifting in the world’s two largest.
Overall, however, the IMF’s projections are consistent with the “tougher climb” narrative expressed in Nuveen’s fourth-quarter outlook as well as our expectations for below-average returns on publicly traded assets over the next few years.
Brexit: Go back, Union Jack, do it again
The battle over Brexit has been raging for more than three years, leaving two U.K. prime ministers (David Cameron and Theresa May) in its destructive path. And current PM Boris Johnson isn’t out of the woods yet. Despite reaching an agreement with the European Union (EU) last week, Johnson faced another hurdle over the weekend: wrangling Parliamentary approval for the deal in a rare Saturday session. (Deal or no deal, the deadline for the U.K. to leave the EU is October 31.)
The good news for Johnson on Saturday was that Parliament didn’t vote “Nay.” The bad news for Johnson on Saturday was that Parliament didn’t vote “Ay.” In fact, Parliament didn’t vote on the Brexit agreement at all.
Instead, members demanded more time to examine the deal. So the prime minister, who once said he’d rather be “dead in a ditch” than ask the EU for an extension, asked the EU for an extension (until January 31, 2020), as required under U.K. law. Bloodied but unbowed, Johnson remained confident of securing passage prior to October 31. A vote is expected early this week.
The British pound has been a Brexit barometer, rising against the U.S. dollar whenever optimism over a deal has flashed and falling when hope has faded. Last week, the pound reached a five-month high against the greenback.8 British consumers tend to cheer such strengthening, as a more muscular currency weighs on domestic inflation, helping to keep prices down.
In contrast, a stronger pound is a source of pain for U.K. exporters, because it means less-competitive prices for their products in other countries. Exports make up approximately 30% of U.K. GDP, based on World Bank data. And falling exports is not what the U.K. economy needs right now: In the second quarter, GDP declined 0.2%, its first drop since 2012.9