16-06-2013, 10:57 PM
It may be talking about Australian markets but remains broadly applicable to global markets as well.
Relax, don't worry about China or US
Bassanese David Bassanese
901 words
15 Jun 2013
The Australian Financial Review
AFNR
English
Copyright 2013. Fairfax Media Management Pty Limited.
David Bassanese
Two central drivers of global investment markets are continued fears of a slowdown in the Chinese economy and fears that the United States Federal Reserve is on the verge of tightening monetary policy.
I find it hard to get overly worried about either. For this reason, I view the pull-back in global equity markets as a bull market correction rather than the start of the new bear market downturn.
That said, the drivers of the global and Australian economy are shifting, which suggests local interest rates will stay relatively low, the Aussie dollar could keep falling and the local sharemarket, though still likely to rise, might underperform global peers.
Digging into our market in more detail, persistent low local interest rates should continue to encourage a pick-up in credit growth and support the financial sector. The cheapening Aussie dollar, meanwhile, favours those companies with significant offshore earnings and/or those forced to compete against imports. Resource companies will welcome the cheaper Aussie, though their fortunes are more mixed as they're also facing a weaker world commodity price outlook.
So why am I relaxed and comfortable about China and the United States?
Let's start with the Red Dragon first. While China pessimists are quick to pounce on any sign of weaker growth, they seem to ignore the fact that overall growth is still robust – and broadly in line with what the Chinese authorities are targeting.
The big disappointment with China is that growth has been slowing for the past two years, and there were some hopes late last year that this deceleration had ended – i.e. growth was finally "stabilising" at around 7.5 to 8 per cent. But growth then decelerated a bit further in the March quarter (from 7.9 per cent to 7.7 per cent), and China's official manufacturing index has struggled to get much above the so-called "expansion/contraction" reading of 50. Last week's release of industrial production, investment and retail spending also was a touch softer than analysts anticipated.Manufacturing index well above lows
Let's remember, however, the authorities are only targeting 7.5 per cent growth this year – so they're hardly worried about the growth we've seen to date, which is why they continue to disappoint those waiting for more fiscal stimulus. As for China's manufacturing index, even a reading of 50 is still consistent with quite brisk growth in industrial production – and the index is still well above the lows it briefly plumbed during the 2008 global financial crisis.
Indeed, last week's data releases revealed Chinese industrial production was still up 9.2 per cent over the year to May, fixed-asset investment was up 19.9 per cent and retail sales were up 12.9 per cent.
China is also a much larger economy than it was a decade ago. It neither can nor wants to grow at the rates evident back then. Given its growing economic might, however, the slowing in growth still implies a quite strong contribution to overall global demand.
Last but not least, if China's economy ever did truly stumble – as last evident in 2008 – the government has ample fiscal firepower to pump-prime the economy again if need be. To my mind, China's near-term economic prospects at least (i.e. over the next two to thee years) remain very sound.
As for America, it's still unclear when the Fed will start slowing down its pace of bond buying – which will be the first step toward an eventual renormalisation of monetary policy and higher interest rates. Last week's US employment report did show solid employment growth, but not yet enough to make serious inroads into the level of unemployment. Some federal spending cuts are also still taking effect, which is adding further headwinds to the economy's recovery.Economy has ample spare capacity
To my mind, it still seems likely the Fed will start to "taper down" its bond-buying program before year end, which will be a painful announcement for Wall Street to hear. But before investors throw the baby out with the bath water, it's important to remember that US inflation remains very low and the economy retains ample spare capacity. As a result, the Fed can afford to tighten gradually and cautiously – and won't do anything to risk the recovery. That's a big difference from the latter stages of a tightening cycle when rising inflation and low unemployment can force the Fed to slam on the brakes.
Indeed, history shows that the withdrawal of Fed stimulus is usual as economic growth improves, and while the sharemarket can suffer a corrective period, the bull market remains intact.
As concerns Australia, we need not worry about China – and the day the Fed begins to tighten should be considered good news, as it suggests the US recovery is durable.
But the best news is that Fed tightening, to the extent it helps drive up the US dollar, will make the Aussie dollar cheaper at a time of improving global growth. That's how it should be given that expanding commodity supply and more moderate Chinese economic growth suggest the next phase of global expansion will be associated with weaker rather than stronger commodity prices.
Fairfax Media Management Pty Limited
Document AFNR000020130614e96f00057
Relax, don't worry about China or US
Bassanese David Bassanese
901 words
15 Jun 2013
The Australian Financial Review
AFNR
English
Copyright 2013. Fairfax Media Management Pty Limited.
David Bassanese
Two central drivers of global investment markets are continued fears of a slowdown in the Chinese economy and fears that the United States Federal Reserve is on the verge of tightening monetary policy.
I find it hard to get overly worried about either. For this reason, I view the pull-back in global equity markets as a bull market correction rather than the start of the new bear market downturn.
That said, the drivers of the global and Australian economy are shifting, which suggests local interest rates will stay relatively low, the Aussie dollar could keep falling and the local sharemarket, though still likely to rise, might underperform global peers.
Digging into our market in more detail, persistent low local interest rates should continue to encourage a pick-up in credit growth and support the financial sector. The cheapening Aussie dollar, meanwhile, favours those companies with significant offshore earnings and/or those forced to compete against imports. Resource companies will welcome the cheaper Aussie, though their fortunes are more mixed as they're also facing a weaker world commodity price outlook.
So why am I relaxed and comfortable about China and the United States?
Let's start with the Red Dragon first. While China pessimists are quick to pounce on any sign of weaker growth, they seem to ignore the fact that overall growth is still robust – and broadly in line with what the Chinese authorities are targeting.
The big disappointment with China is that growth has been slowing for the past two years, and there were some hopes late last year that this deceleration had ended – i.e. growth was finally "stabilising" at around 7.5 to 8 per cent. But growth then decelerated a bit further in the March quarter (from 7.9 per cent to 7.7 per cent), and China's official manufacturing index has struggled to get much above the so-called "expansion/contraction" reading of 50. Last week's release of industrial production, investment and retail spending also was a touch softer than analysts anticipated.Manufacturing index well above lows
Let's remember, however, the authorities are only targeting 7.5 per cent growth this year – so they're hardly worried about the growth we've seen to date, which is why they continue to disappoint those waiting for more fiscal stimulus. As for China's manufacturing index, even a reading of 50 is still consistent with quite brisk growth in industrial production – and the index is still well above the lows it briefly plumbed during the 2008 global financial crisis.
Indeed, last week's data releases revealed Chinese industrial production was still up 9.2 per cent over the year to May, fixed-asset investment was up 19.9 per cent and retail sales were up 12.9 per cent.
China is also a much larger economy than it was a decade ago. It neither can nor wants to grow at the rates evident back then. Given its growing economic might, however, the slowing in growth still implies a quite strong contribution to overall global demand.
Last but not least, if China's economy ever did truly stumble – as last evident in 2008 – the government has ample fiscal firepower to pump-prime the economy again if need be. To my mind, China's near-term economic prospects at least (i.e. over the next two to thee years) remain very sound.
As for America, it's still unclear when the Fed will start slowing down its pace of bond buying – which will be the first step toward an eventual renormalisation of monetary policy and higher interest rates. Last week's US employment report did show solid employment growth, but not yet enough to make serious inroads into the level of unemployment. Some federal spending cuts are also still taking effect, which is adding further headwinds to the economy's recovery.Economy has ample spare capacity
To my mind, it still seems likely the Fed will start to "taper down" its bond-buying program before year end, which will be a painful announcement for Wall Street to hear. But before investors throw the baby out with the bath water, it's important to remember that US inflation remains very low and the economy retains ample spare capacity. As a result, the Fed can afford to tighten gradually and cautiously – and won't do anything to risk the recovery. That's a big difference from the latter stages of a tightening cycle when rising inflation and low unemployment can force the Fed to slam on the brakes.
Indeed, history shows that the withdrawal of Fed stimulus is usual as economic growth improves, and while the sharemarket can suffer a corrective period, the bull market remains intact.
As concerns Australia, we need not worry about China – and the day the Fed begins to tighten should be considered good news, as it suggests the US recovery is durable.
But the best news is that Fed tightening, to the extent it helps drive up the US dollar, will make the Aussie dollar cheaper at a time of improving global growth. That's how it should be given that expanding commodity supply and more moderate Chinese economic growth suggest the next phase of global expansion will be associated with weaker rather than stronger commodity prices.
Fairfax Media Management Pty Limited
Document AFNR000020130614e96f00057