MARKETS POINT TO U.S. AS BEST BET FOR INVESTING
World more complex, but beware putting all eggs in one basket, Joe Chidley writes.
Anyone out there remember 2017? Anyone? It seems so long ago now. But one vaguely recalls it as a much simpler time, economically speaking.
At long last, it looked as if the world had shrugged off the burden of the Great Recession. Economies everywhere were growing — the U.S. by 2.3 per cent (up from 1.5 per cent in 2016), Canada by three per cent (fastest in six years), China by 6.9 per cent (its first annual growth pickup since 2010) and sluggish old Europe up by 2.5 per cent (highest in a decade). Even Japan saw GDP growth accelerate last year, by 70 basis points to 1.7 per cent — a number that would hardly set palms a-sweating anywhere else but Japan, home of the Lost Decade(s).
For investors with a wide world view, it turned out to be a very good year. Synchronized growth and optimism around the global economy rewarded geographically diversified investors handsomely. While the S&P 500 reached records and closed the year up nearly 19 per cent, other exchanges in other regions were doing boffo, too. The MSCI Emerging Markets Index rose by nearly 35 per cent, Japan’s Nikkei 225 ended the year up 17.7 per cent and Europe’s Euro STOXX 600 index rose by 8.7 per cent. The TSX was something of a laggard, but its 4.6-per-cent rise last year was not all that bad. Ah, those were the days. And they’re gone now. Where once you could park your money pretty much anywhere and expect more of it at yearend, things have got a lot more complicated. Japan’s Nikkei 225 is down 3.7 per cent on the year; the Euro STOXX 600 is down 5.6 per cent; emerging markets are down 8.3 per cent. Chinese investors are still tiptoeing through bear territory.
The S&P/TSX has fared better, but 2018 is making last year’s “not all that bad” look downright “awesome” — the Canadian index is up by about half of one per cent year-to-date.
Now, I know the market is not the economy, but GDP growth is slowing significantly in the respective regions on the above list — by 30 basis points in Europe, 70 bps in Japan and 40 bps in China, according to World Bank forecasts, and by a full percentage point here in Canada, according to our own central bank.
Of course, there is an exception to this slowdown. The U.S. economy is poised to grow by 2.7 per cent this year, according to the World Bank, and on Wednesday the revised second-quarter GDP number came in at 4.2 per cent — an upside surprise. The S&P 500 marked another gain following the news. Like it needed it: the index is already up eight per cent on the year.
So here’s the thing: global economic growth is still looking strong for 2018, at 3.1 per cent according to World Bank estimates — basically unchanged from last year. But the composition of that growth is changing. The U.S. economy comprises a bigger chunk of it, and investors in U.S. equities have been reaping the rewards. The rest of the world, more or less, has to get by on the trimmings.
Now, there are plenty of reasons for this dissolution of synchronized growth. One is the U.S. dollar’s strength, supported by the Federal Reserve’s tightening while Europe remains in stimulus mode for now and Japan remains in stimulus mode for basically forever. The surging greenback has put the screws to emerging markets, in particular. Then there’s the U.S. stimulus package, which has helped corporations achieve stellar earnings. And then there’s the brewing trade wars between the U.S. and just about everybody else — from the hundreds of billions in nowtariffed Chinese imports to the possible dissolution of NAFTA. President Donald Trump, who seems to have perfected the art of creating a crisis, if not resolving any, isn’t helping to calm fears in non-U.S. markets.
So what’s a globally minded investor to do? One logical response is, why fight it? Just over-allocate to U.S. stocks and fade the meh rest of the world. But now might be exactly the wrong time to put too many eggs in one basket. For one thing, while U.S. corporate earnings have been strong, Trump’s tax cuts might prove a short-lived stimulus — it’s not like companies will get an extra tax break next year, after all. U.S. equities are hardly inexpensive: the S&P 500’s price/equity ratio has climbed above 24, up about 50 basis points from a year ago. Meanwhile, the chances of a Fed policy error go up with every rate increase. And finally, at a certain point, markets might have to come to grips with growing U.S. political risk — from the midterm elections in November to the Robert Mueller investigation.
That leaves the rest of the world. And it’s not all bad news. At the very least, equity valuations have moderated, making global stocks cheaper (especially in Asia). The economics aren’t all terrible, either. China’s consumer spending is still growing faster than the overall economy; Japan stands to benefit from the weaker yen against the dollar. Meanwhile, corporate earnings growth in Europe is picking up steam. But the risk of trade disruption, and how deep the damage might go, still hangs over everything.
So is it time to stop thinking globally? I’d say no. But to be honest, I wish I could say it with the same conviction I would have back in 2017.