Global eq­uity out­look 2017

Kuwait Times - - BUSINESS - By Hay­der Taw­fik

Global eco­nomic growth is mov­ing slowly but fi­nally it is emerg­ing with most economies. This is quite dif­fer­ent from the past few years. Also, it ap­pears that global eco­nomic growth set to im­prove more than what we have been ex­pe­ri­enc­ing in the past few years. How­ever, this im­prove­ment should be sup­ported by steady con­sumer spend­ing, in­crease in em­ploy­ment and house­hold strength in the United States, com­modi­ties pro­duc­ing coun­tries, a re­bound in eco­nomic ac­tiv­i­ties in the Europe and con­tin­ued ac­com­moda­tive mon­e­tary poli­cies by non-US cen­tral banks.

The US eco­nomic cy­cle has been the long­est in re­cent mem­o­ries. It is go­ing into 2017 with steady growth and fall­ing un­em­ploy­ment. The eco­nomic ex­pan­sion is most likely to con­tinue even in the face of the Fed­eral Re­serve rais­ing in­ter­est rates. Al­though the pace of eco­nomic growth may not be that strong but there are signs of op­ti­mism for the US econ­omy and global eq­uity mar­kets un­der new pres­i­dent. If global growth does not ac­cel­er­ate then more fis­cal stim­u­lus mea­sures will be in­tro­duced rather than eas­ing mon­e­tary poli­cies.

Some com­modi­ties pro­duc­ing economies and emerg­ing mar­kets may see their economies re­bal­anc­ing fol­lowed by struc­tural re­forms. Many de­vel­oped economies are slowly com­ing out of the dis­in­fla­tion­ary pres­sures they been fac­ing over the past few years. In the United States, hints of wage growth, en­cour­ag­ing em­ploy­ment data and an over­all build in key in­fla­tion gauges have led to grow­ing mar­ket sen­ti­ment that the US Fed­eral Re­serve is on track to raise in­ter­est rates fur­ther in 2017.

The eu­ro­zone and Ja­pan have ex­hausted their mon­e­tary poli­cies and most likely that they will in­tro­duce some fis­cal mea­sure to bol­ster their eco­nomic growth. I be­lieve that fis­cal stim­u­lus should be used to spark in­fla­tion along with fi­nan­cial re­pres­sion to keep real in­ter­est rates neg­a­tive. It seems that they years of aus­ter­ity mea­sures are over. Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi re­cently ap­pealed for more ex­pan­sive bud­getary pol­icy. Mean­while, Ja­panese pol­i­cy­mak­ers an­nounced a fis­cal stim­u­lus pack­age, and the Bank of Ja­pan com­menced ef­forts to en­gi­neer a steeper yield curve i.e., in­crease the dif­fer­en­tial be­tween longer-term and short­ert­erm gov­ern­ment bond yields.

Un­cer­tain­ties

Al­though there are some con­cerns about low global eco­nomic growth, high gov­ern­ments debts and po­lit­i­cal un­cer­tain­ties as well as an ag­ing US bull mar­ket in stocks and el­e­vated eq­uity val­u­a­tions rel­a­tive to his­tory in key sec­tors, it ap­pears the gen­eral con­sen­sus of eq­uity mar­ket in­vestors is that cau­tion seems war­ranted. The re­cent ral­lies in oil and com­mod­ity prices and the im­prove­ment in the pri­vate sec­tors ac­cess to money and credit have eased some short-term risks but still there are chal­lenges over the longer term.

The re­cent ral­lies in global stock mar­kets have stretched eq­uity val­u­a­tions and it ap­pear to be pric­ing in strong eco­nomic and earn­ings re­bounds, while re­laxed cen­tral bank pol­icy seems to be re­flected in the prices of many global eq­ui­ties. In­vestors should fo­cus on and an­a­lyze very care­fully those stocks that are rightly po­si­tioned to take ad­van­tage of an ac­cel­er­ated global eco­nomic growth. Us­ing a bot­tom up ap­proach might un­cover great in­vest­ment ideas but also ap­ply­ing a top down ap­proach to take ad­van­tage of a re­bound in in­fla­tion that might drive the global fi­nan­cial mar­kets in the years ahead.

In an in­fla­tion­ary en­vi­ron­ment, eq­ui­ties his­tor­i­cally have gen­er­ally fared bet­ter than many other as­set classes in par­tic­u­lar fixed in­come bonds. This kind of eco­nomic en­vi­ron­ment should be fa­vor­able for banks, fi­nan­cial in­sti­tu­tions, com­mod­ity re­lated economies and con­sumer cycli­cal sec­tors. As for the US in­dus­tri­als and in­fra­struc­ture re­lated sec­tors should ben­e­fit from the prom­ises made by the newly elected US pres­i­dent. In­dus­trial com­pa­nies should be the key ben­e­fi­cia­ries of po­ten­tially higher growth and ex­pand­ing in­fra­struc­ture spend­ing. I be­lieve a po­ten­tially stronger US econ­omy of­fers a pos­i­tive dy­namic for many other economies and mar­kets, al­low­ing for a po­ten­tial shift in eq­uity mar­ket lead­er­ship from the United States to other parts of the world.

Ob­vi­ously, there are lots of un­cer­tainty sur­round­ing the speed of global eco­nomic growth and the du­ra­tion of the cur­rent eco­nomic cy­cle and its ex­pan­sion but I think the trend has changed and at present there are more sup­port for eq­uity in­vest­ments than there was over the past few years.@Rasameel

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