Equity Prices See Modest Gains; Data Indicate Growth Momentum in Developed Countries
International equity prices saw marginal gains in December as investors weighed the improved global economic outlook against the reduction in monetary stimulus from the U.S. Federal Reserve. Economic trends have become more positive across most regions, helped by the improving business environment and consumer sentiment in the U.S. as well as in Europe. Japan continues to see stronger export gains as demand revives in its major markets and the cheaper yen remain supportive. The emerging markets underperformed again as investors are cautious about the political environment in countries such as Thailand and Turkey. The U.S. Federal Reserve’s announcement that it would reduce its bond purchases by $10 billion a month did not cause undue disturbances in the financial markets.
Global economic data indicated sustained positive growth momentum across most developed countries. Global manufacturing output expanded for the twelfth month in a row in December, while export orders also increased further. Factory output growth saw strong gains in the U.S., the U.K., Japan and Germany, while France saw a decline and activity in Canada slowed. Emerging countries continue to see slower factory output growth when compared to developed countries, though almost all countries increased production in December. Global services activity also expanded further in December, helped by gains in the U.S., U.K., and Japan. In Europe, services activity declined in France and Italy.
Near-Term Outlook
While the U.S. Federal Reserve has started winding down its bond purchases, the European Central Bank and Bank of Japan continue to maintain highly accommodative monetary policies. The Bank of Japan has pursued aggressive quantitative measures to lift inflation and revive consumer spending as well as investments. In Europe, the central bank lowered its benchmark rate in November and has not ruled out further policy measures. As inflation remains well below the ECB’s target, despite the improved economic outlook, it is possible that the central bank may consider quantitative measures if necessary. In addition, the ECB is also expected to offer additional long-term funding to the region’s banks to further strengthen their balance sheets. The ECB is taking over as the regulator for the region’s large banks, which is expected to reduce policy uncertainties and reduce systemic risks in the future.
As economic signals improve and political risks fade, an upturn in business investments could become increasingly likely this year. The major industrial manufacturers have not invested in capacity in recent years, as the demand outlook has mostly remained uncertain through the weak and inconsistent economic recovery since 2009. Signs of improving consumer sentiment could encourage businesses to consider capacity additions or new facilities. The relatively older capital equipment, due to years of underinvestment, could also merit replacement to improve production efficiency. Companies are sitting on record high cash reserves, and continue to enjoy healthy cash flows, which should make it easier to finance capital spending plans. In addition, borrowing costs remain exceptionally low for good quality borrowers even after the recent gains in bond yields.
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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