UAE. Just as investors were getting comfortable, a slew of economic data from around the world upsets things. Euro zone economic data showed deterioration across the board, even in Germany.
Weak Chinese data has investors concerned that China could slip into a recession and in the US the housing market data showed limited sign of improvement. Investors remain upbeat but reluctant to chase the markets from current levels until better news is forthcoming.
For choice we would look to buy emerging market bonds after their recent sell off.
Investors got a jolt last week when global economic data seemed to show a slow-down. Eurozone data showed the second consecutive down month for industrial confidence. Surprisingly confidence fell in previously stronger parts of the Euro zone namely German and France. It would be wrong to get too negative.
The level of industrial confidence is still consistent with a modest recession and not a fall into another significant slump. The flash estimate of Chinese industrial confidence was significantly below expectations falling to 48.1 in March from 49.6 in February.
However before investors get too worried bear in mind this was the first setback in confidence following three months of rises. Encouragingly indicators of export orders did pick up after their recent bout of weakness.
At least one worry abated last week. The sell-off of the US government bond market abated.
The worry was that significantly higher US government bond yields would lead to some serious selling pressure on higher yielding bonds such as emerging market bonds or local bonds. In the event the US 10 year government bond yield peaked at 2.38% up from the 1.90% level a few weeks ago. As we have argued it would be wrong to write-off bonds as investment on the assumption that yields were about to rise sharply from here.
Most commentators envisage US 10-year yields to rise maybe as high as 2.5% through the course of the year but no higher.
If US 10 year yields can stay in a modest range then this will provide a reasonable backdrop for other bond markets. In the emerging debt markets yields have risen on average 25bps from the low providing a reasonable buying opportunity.
Flows into emerging market bond funds have remained strong despite the wobbles in the US bond markets. With the good news that the volatility of the US government bond market seems contained emerging markets can continue to perform.
Unfortunately investors will probably continue to live on their wits from week to week as the longer term perspective remains hazy. In amongst all the noise of the markets I’m sure we like many investors would like to see a more sustained positive outlook for the global economy.
However more consistent performance from the markets needs a sustained recovery in consumption particularly in the western world. Only if consumption improves will the recent recovery in manufacturing be sustained. The only way those consumers can consume more is that they have more money in their pockets. Spending power for consumers comes from more people being in work, more income from wage growth and credit growth.
In the US the number of people in work bottomed in 2010 and has grown steadily since. However wage growth has been very modest. Overall household income growth has started to fall back again. Also householders are seeing their incomes eaten away by the 20% rise in gas prices since the start of the year.
European consumers face greater problems. The number of people in work in the Euro zone continues to fall. Wage growth in a number of countries is negative. Taxes on incomes continue to rise. Taken in aggregate Euro zone consumers will be contributing little to aggregate growth in global demand for some time to come.
Despite the problems of Europe we do not give up on all Euro zone consumer stocks. European luxury goods companies continue to see spectacular sales growth. In a world where there are so many doubts about the pace of global growth it is good to hear that the luxury goods sector is still strong.
Our advisors recent conversation with Louis Vuitton for example point to 27% sales growth in 2011 in Asia ex Japan, China’s growth was 25% and could accelerate still further as import duties are reduced. Note that Louis Vuitton has still to build a noticeable business in the Indian market; to-date they have only four mini-boutiques.
Pernod Ricard achieved 11% sales growth in their most recent trading period. The contrast between the new world and old world markets is quite marked with 26% sales growth in India but –11% in Italy. We believe investors should look for any weakness in the stock markets as an opportunity to accumulate holdings of luxury brands.
The Euro zone debt crisis will just not lie down and go quiet. In recent days, Spanish and Italian bond yields have risen again and the newly restructured Greek bonds have fallen in price to yield 20%. Spain has become a recurring worry for financial markets. It is not so much that the Spanish government has not tried hard to resolve its problems.
The economic recession in the economy is leading to a deterioration in the financial circumstances of the country such that a potential bail out will be needed from the ECB and from the funds set up to save countries such as Greece.
The pressure on Spain has been exacerbated by recent data that showed the government budget deficit to be far worse than was expected and signs that the Euro zone economy was slipping deeper into recession with even Germany seeing weaker than expected data.
We continue to look for buying opportunities below US$1,600 to add to our gold positions. The imposition of an extra tax on gold purchases in India has unnerved the market somewhat with ongoing jewelers’ strikes and protests against the tax in India adding to the sentiment driven down side risks.
On the other-hand the coming political upheavals in the Euro zone with elections in Greece and France could still add to feeling of nervousness in the markets- good news for gold. The noisy economic data and still significant debt problems mainly in Europe keep us as long term buyers of gold.