The global economy gained momentum in the June quarter of this year after a slow patch in the March quarter but in more recent weeks some negative data appears to have alarmed investors.
World share markets suffered a reversal in late August after investors took fright at the release of weak manufacturing data for China for the month.
However, as the data providers (the Caixin Insight Group) made clear with this release, ‘overall, the likelihood of a systemic risk remains under control and the structure of the Chinese economy is still improving’.
While it is true that China’s economy appears to be slowing, this is likely to be only marginally so.
As the International Monetary Fund (IMF) notes in its August report on China: ‘China’s growth is expected to be 6.8% in 2015, down from 7.4% last year’ but this is because ‘China is moving to a “new normal” of slower yet safer and more sustainable growth’.
As the IMF also notes in this report, ‘the recent stock market correction will not derail the ongoing adjustment to a slower yet more balanced growth path’, with the latter entailing a shift away from dependence on exports to a more domestically focused economy, a shift that is already well underway.
However, with the economy under some pressure at present, on Tuesday 25 August the Chinese central bank cut the reserve requirement ratio for banks by 0.5% and cut official interest rates by 0.25% to boost bank lending, which was already growing strongly.
Apart from this monetary expansion now underway in China, expansionary ‘quantitative easing’ has been in place for some months in Europe and is also being implemented in Japan, while the US economy has been growing at a reasonable pace, all of which could be expected to assist global economic recovery over coming months.
This coincides with the view of the IMF in its July update that there is likely to be ‘a gradual pickup in advanced economies’ due to ‘easy financial conditions, more neutral fiscal policy in the euro area, lower fuel prices and improving confidence and labour market conditions’.
The Australian economy grew at a solid pace in the March quarter (0.9% for the quarter alone) and probably also performed well enough in the June quarter.
However, the NAB Business Survey for July noted that during the month ‘confidence fell back below the long-run average, suggesting an escalation in Chinese growth concerns could be putting firms on alert’.
Furthermore, the survey noted that ‘the Australian economic outlook remains mixed and patchy’ with mining investment still ‘declining sharply’.
Major share markets took a steep dive in late August, mostly due to negative news out of China, with the drop erasing some of this year’s earlier gains. Overall, from 1 January to 26 August, the broad US market (S&P500 index) was down 6%, while the technology-focused Nasdaq was down 1% and the UK and Chinese markets were each down 9%.
On the other hand, Germany and Japan were up respectively by 2% and 5%. The Australian market was down 2% (accumulation index). Most share markets currently appear to be fairly priced, at least compared with other sectors, such as bonds.
Major global government bond markets saw yields (interest rates) trend upwards in the first half of this year and then reverse direction, reflecting doubts about the strength of the global economy. Overall, bond markets continue to look relatively expensive.
Fiducian’s diversified funds are currently around benchmark for domestic shares and listed property but remain overweight for international shares. Exposure to fixed interest sectors is underweight, while cash weightings remain above benchmark.
Source: Conrad Burge, Investment Manager, Fiducian Financial Services.
