International Equity Commentary – September 2013
Healthier trends from the developed world improve economic outlook
International equity prices saw robust gains in September as the U.S. Federal Reserve unexpectedly refrained from reducing its bond purchase programs. In addition, the lowering of the U.S. growth forecast by the Fed lifted investor optimism that the quantitative easing is likely to be wound down at a very gradual pace. To some extent, the Fed’s decision has eased fears of lower capital inflows into equities in the short term. In Europe, political risks in Italy have eased after the government won the confidence vote. The reelection of the ruling coalition in Germany also boosted investor sentiment as it ensures policy leadership and continuity in the region. Emerging markets also bounced back during the month, despite persistent concerns about slower growth in those countries.
Global manufacturing activity gained further in September and the Global PMI index rose to its highest level in more than two years. Output growth was the strongest in the U.K. as the Euro-zone resumed expansion, reaffirming the modest economy recovery in the region. The U.S. and Japan also saw further gains, but data from the emerging markets were relatively subdued. Output growth was unchanged in China, Indonesia, and Brazil while countries such as Korea, India, and Russia saw marginal declines. New export orders also increased to the strongest level in more than three years, with notable gains in the Euro-zone. However, global services activity saw a moderation in the pace of growth in September when compared to the previous month.
Near-Term Outlook
The global economic outlook has improved when compared to the first half of the year, helped by the healthier trends from the developed world, especially the U.S., the Euro-zone and Japan. All these countries/regions saw faster than expected expansion during the second quarter and the trend likely continued during the third quarter as well. Manufacturing and services growth remains robust, boosted by gains in domestic consumption. However, in Europe, the political climate remains uncertain in countries such as Italy, and the region has to go further to solve its long-term fiscal challenges. The government shutdown in the U.S. could potentially slow the economy, and hurt demand for imports from rest of the world. In Japan, the increase in consumption taxes could restrict the pace of expansion, though the government is trying to limit the damage with additional fiscal stimulus.
As the recovery in the developed world takes hold, central banks will likely start withdrawing the extraordinary monetary measures. Bond yields have already moved higher in anticipation, and could firm up further when the U.S. Fed starts tapering its bond purchases. Though borrowing costs for most consumers are unlikely to see any significant change, even small increases in interest rates could slow down the demand growth in sectors such as housing. In addition, higher bond yields could also push up borrowing costs for governments and worsen their fiscal balance. The emerging markets could see lower capital inflows as interest rates in the developed world firm up.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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