Global Recovery is On Track

New economic data has reinforced the positive outlook for a broad-based recovery in the global economy - good news for investors in China and Europe

Coutts 28 May, 2014 | 4:42PM
Facebook Twitter LinkedIn

This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Alan Higgins, Chief Investment Officer, UK at Coutts gives his market round up.

The latest round of purchasing managers’ indices (PMIs) of business activity has reinforced the positive outlook for a broad-based recovery in the global economy.

These surveys, which provide a more-timely indicator of underlying growth than gross domestic (GDP) figures, suggest a continued strengthening in developed economies.

This in turn is helping to boost trade and bring stabilisation to the major emerging economies.

In the midst of some weak Chinese data in recent months, we have maintained the view that business activity would improve in the second quarter as the US thawed (following last winter’s “big freeze”) and demand picked up in Europe. That’s what we’re now seeing.

China’s flash PMI estimate for manufacturing jumped nearly two points to its highest this year, to levels suggesting the recent slowdown may be coming to an end. Both domestic and foreign orders have started to increase and backlogs of work/stocks of finished goods have decreased for the first time in many months. The output index inched into expansion mode (50+) at 50.3.

While the eurozone composite PMI was barely changed, but consistent with an improving trend in underlying growth. This was achieved despite some external challenges, particularly the Ukraine crisis and strength in the euro. Details in the components were also encouraging, with modest gains in the employment, new orders and output indices.

Gains in services offset weakness in manufacturing, and at a country level, France was the only real disappointment, while Germany’s PMI suggested steady robust activity and the periphery continued to improve.

Survey respondents in Germany were upbeat on the economic outlook and noted improved orders from Europe, Asia and the US, which reinforces our view that global trade is picking up.

Equities: Green Shoots in Europe

With just shy of 90% of European companies having announced their results, earnings have been better than expected and increased marginally quarter-on-quarter. Overall, 147 companies have beaten expectations while 119 have missed. This is just the second quarterly increase since September 2010 and suggests we may be witnessing Europe’s first earnings recovery since the Credit Crisis.

However, revenues remain weak. Much of this has been the result of weaker sales in the industrials and consumer discretionary sectors in core European countries such as Germany, the Netherlands and Sweden. Conversely, we are witnessing revenue growth in peripheral markets such as Italy and Spain.

These first signs of a recovery in growth are consistent with recent improvements to PMIs, confirming our view that the consensus on Europe remains too negative. We maintain our equity preference for Europe over the US.

Bonds: US Outlook More Upbeat Than Yields Suggest

Despite signs of improving US and global growth, Treasury yields have dropped to 2.5%, suggesting a gloomier outlook. But against this market move, our year-end forecast for Treasury yields remains unchanged at 3%.

As a result, we see risks for Treasury yields skewed to the upside (prices to the downside) over the remainder of the year. Given the recent strong tendency of US, UK and German government bonds to move in tandem, we believe risks for UK gilts and German bunds are similarly slanted. However, we think high-quality bonds will continue their trend of moving in the opposite direction to equities, which means they still have a diversification role to play in protecting portfolios from any fall in share prices.

Morningstar Disclaimer
The views contained herein are those of the author(s) and not necessarily those of Morningstar. If you are interested in Morningstar featuring your content on our website, please email submissions to UKEditorial@morningstar.com

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Coutts  Coutts provides customised solutions for clients private banking and wealth management needs.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures