Holly Cook: Welcome to the Morningstar series, "Ask the Expert." Today we are going to look at the global economy in a nutshell. Joining me is Cyrique Bourbon, he is a senior portfolio manager for Morningstar.
Cyrique, thanks for joining me.
Cyrique Bourbon: Thanks for having me.
Cook: So we are going to look at the lay of land in economic terms. Let's start with sort of the key general trends, what are you seeing?
Bourbon: The main trend we saw starting in 2014 was a weakening of the economic data released, especially in the US, where they are having significant impacts from the weather disruptions. This meant that some of the leading indicators started worsening a bit, but they have been quite volatile.
So actually we have noticed in the last month or so that the data has come back up a bit, especially the leading indicators on the manufacturing sides, on the servicing sides, both of which are actually still in expansion territory.
Cook: So a weak start but already things in the US looking a bit more positive.
Bourbon: Exactly. And actually it's looking even more positive on one of the key things we are monitoring very closely, which is employment. And in the last two or three weeks we have seen the nonfarm payroll data coming up very positively for February and also the initial jobless claims last week, which came down to about 320,000, which is basically a resuming of the trends – down trend we have seen in terms of unemployment.
Cook: So a more positive story in the U.S. there. How about closer to home, the UK, Europe?
Bourbon: The UK has actually been very strong. We are seeing some of the investment houses revising the expectations up for UK economic growth in 2014. Some of them being close to 3.5% now, so really strong drivers there, on different fronts; on the manufacturing side, but also in terms of business investments and it's also worth noting in the UK the property market is recovering very nicely.
Cook: Always something that we like to hear, us Brits are obsessed about property.
Bourbon: Exactly.
Cook: And what about Europe?
Bourbon: In Europe the trend that we saw last year with the recovery of the periphery emerging continues. And we are seeing that in the last couple of weeks with some of the better data releases coming through in countries like Italy or Spain, as well as actually France, which has been a country that has had a bit of a slow recovery in the last couple of years. And we had some good data yesterday on the French leading indicators.
Cook: So this is all sounding very positive. But I wanted to ask you about Russia. Obviously the events playing out in Russia, Ukraine, Crimea are filling the headlines and Russia has actually been the worst performing stock market so far this year. How do you see that playing out and affecting stock markets and investors?
Bourbon: So the main issue with Russia is that it needs to remain contained, because the biggest risk is that there is an escalation of the sanctions and of the geopolitical situation between Russia and Western Europe, as well as the US, which could bring potentially the global economy to a halt, potentially into recession.
Because let's not forget that Russia is a main trading partner for Western Europe in terms of its oil and gas imports.
And obviously should there be a disruption on that side there would be a global economic recession and this is something that I'm sure all major governments are keen to avoid. And actually what's interesting to note is that governments have reacted so far in a very muted fashion.
And that is something that is pretty consistent, what's happened historically, in terms of the relationships between Russia and the West.
Cook: So these are some pretty major trends playing out. To wrap it up from the investor's point of view, what does this all mean about what you should actually be doing with your money?
Bourbon: For investors, it's understandable that the current times are pretty unsettling on the geopolitical stand front. With China as well where there are signs of a hard landing and this is clearly concerning the investors and fund managers that we speak to as well. And also with markets having rallied pretty substantially in the last three or four years, there's definitely potential time for pause and I would consider investors wait for a pullback before adding to an equity risk in their portfolios.
Cook: So we have seen strong economic performance in the UK and Europe and the US. We are seeing some turbulent times in Russia and that has the potential to impact the global economy. But for somebody here in the UK, the average individual investor, it's perhaps an opportunity to sort of take stock and wait for a potential pullback before investing further.
Bourbon: Exactly. Especially as the markets, especially the equity market tends to price future events at the moment. So the risk is that the future events are too unsettling and although the current economic picture may look good, this is already priced into markets and that's why the equity market in the UK did so well last year for instance.
Cook: Excellent. Well Cyrique, thanks very much for explaining this all to us.
Bourbon: My pleasure.
Cook: For Morningstar, I'm Holly Cook. Thanks for watching.
