‘Global Investments’ Category Archives

18
Jun

Brexit – Good or Bad for America?

by Riaan Nel in Global Economy, Global Investments, News

Brexit

This coming Thursday, June 23rd, is the date of the much anticipated British referendum on whether the United Kingdom should remain a member of the European Union or leave.  As of today polls suggest that voters are evenly split.  The Economist magazine in a recent article made the case for how bad Britain’s exit or Brexit would be, not only for the United Kingdom, but for Europe and the West.  The argument goes that in both the economic and security spheres the West and Britain would be harmed if the electorate votes for a Brexit. 

 

I agree from an economic standpoint there seems to be a strong case that a Brexit would be disadvantageous for the United Kingdom.  The capital markets would probably be negatively impacted in the short-term by a Brexit, which would not be good for America or American investors.  However, my sense is that it would be a short lived “market dislocation” and that the Brexit won’t have a long-term negative impact on global capital markets nor American capital markets. 

 

Financial markets are currently jittery in the run up to the election on Thursday.  The British pound has fallen to its lowest level against the dollar since 2009.  Markets like predictability and stability.  The prospect of the uncoupling of the world’s fifth largest economy from the European Union, and the unmooring of the strongest military power within the Union, as well as the world’s fifth largest defense spender, causes nervousness in the financial markets. 

 

I don’t believe that global markets would be harmed by Britain leaving the EU.  I could see where it would damage the British economy in the long run, but I don’t see where it would hurt the United States economically.  We have to be concerned about the short-term market dislocations that might occur if the “leave” vote wins.  It very well might be a buying opportunity for investors.  I am concerned that Brexit might be another factor that could, in conjunction with other issues, signal an end to the 7 year bull market in US equities. 

 

From a security perspective, the Economist magazine makes numerous arguments why a Brexit would diminish Europe and the West’s security.  However, the West’s security is solidly anchored in American military supremacy and NATO.  Britain’s exit does not threaten NATO’s cohesiveness.  I don’t find the security arguments compelling.  Not for us, not for Britain, and not for NATO. 

 

My conclusion is a Brexit is neither bad nor good for America. 

9
Feb

70 Is The New 65: Demographics Still Support ‘Lower Rates For Longer’

by Riaan Nel in Global Investments

Demographic spendingIn many of my public presentations I address the impact of demographics on political and economic outcomes.  I am a firm believer in the adage that demographics are destiny.  I am also a believer in the savings glut theory that posits excess savings in the world are depressing interest rates.  This savings glut was also a contributing factor leading to the global financial crisis in 2008.

A recent study by PIMCO has shed some interesting new light on the savings glut phenomenon.  Matthew Tracey and Joachim Fels state the following in their study:

“Is global aging about to end the savings glut?  Some observers think so. More and more baby boomers are reaching retirement age, and they will soon not only save less but also start to dump their accumulated assets to fund retirement … or so the story goes.  If this were true, the consequences for interest rates would be profound… and what we here at PIMCO call The New Neutral might soon be history.  We strongly disagree with that thesis of an imminent demographics-induced savings drought.  Rather, we have argued in recent work that the global excess supply of savings… is not only here to stay but likely to increase further in the coming years…”

Here is a link to the study: https://www.pimco.com/insights/viewpoints/in-depth/70-is-the-new-65-demographics-still-support-lower-rates-for-longer

 

 

 

 

 

 

30
Jan

Outlook 2016 – Embrace The Routine

by admin in Global Investments

Outlook 2016

 

LPL Financial has released their Outlook 2016.  As they look forward to 2016, the LPL Research team expects a return to routine for some key areas of the economy and market, but by a path that may catch some investors unprepared. Investors will need a solid plan to navigate the changing landscape as they adjust to changes like the start of Federal Reserve (Fed) rate hikes, a maturing economic cycle, and the 2016 elections.  Some of their expectations for 2016 include:

  • U.S. economic growth of 2.5–3%.[1] The mix of that growth may look different than in 2015, with manufacturing, business capital spending, and net exports taking larger roles. Labor markets are almost back to long-term expectations, and inflation may be poised to accelerate. An extraordinary extended period of loose monetary policy in the United States should start to normalize.
  • Mid-single-digit returns for the S&P 500.[2] Stocks, we believe, will not collapse, as many think, or soar, as many hope, but may offer near historical routine returns. Earnings may start to normalize, and oil markets should find their equilibrium. International markets may re-emerge as a more viable investing opportunity. But we are still in the second half of the economic cycle, and investors need to be vigilant about monitoring pockets of volatility and potential signs of an economic downturn.
  • Limited returns for bonds. The year as a whole may look similar to 2015, with bond prices facing the challenges of high valuations, steady economic growth, and the prospect of interest rate hikes. Still, bonds play a vital role in investors’ portfolios to help with risk mitigation and diversification.

 

 

[1] Our forecast for GDP growth of between 2.5–3% is based on the historical mid-cycle growth rate of the last 50 years. Economic growth is affected by changes to inputs such as: business and consumer spending, housing, net exports, capital investments, and government spending.

 

[2] Historically since WWII, the average annual gain on stocks has been 7–9%. Thus, our forecast is in-line with average stock market growth. We forecast a mid-single-digit gain, including dividends, for U.S. stocks in 2016 as measured by the S&P 500. This gain is derived from earnings per share (EPS) for S&P 500 companies assuming mid- to high-single-digit earnings gains, and a largely stable price-to-earnings ratio (PE). Earnings gains are supported by our expectation of improved global economic growth and stable profit margins in 2016.

 

6
Aug

2015 Midyear Outlook – Some Assembly Required

by admin in Global Investments

2015

LPL Financial recently released their midyear economic and market outlook.  Their theme is that investors should pay close attention to portfolio construction going forward.  The economy has delivered six consecutive calendar years of positive returns for stocks since the end of the Great Recession.  However, constructing a strategy for the remainder of the economic expansion will require a tricky assembly.  Divergent monetary policies reveal an uneven global recovery that has triggered an uptick in stock market volatility.  A few important pieces requiring assembly for the remainder of 2015 include:

  • How the US economy pieces together the components needed to bounce back from its lackluster start of the year?
  • After successfully delivering the US economy out of the recessionary “warehouse,” how does the Federal reserve assemble an exit strategy from its six-year policy of zero interest rates?
  • Corporate earnings growth continues to search for that spark to ignite equity advances.

A key point made by the LPL Financial report is the importance of diversification.  Diversification detracted from market returns in 2014, but the beginning of 2015 witnessed the return of diversification benefits.  With volatility poised to rise in the second half of 2015, the potential benefits of diversification should hopefully continue to materialize.

The last point I want to highlight is LPL Research predicting another positive year in the US stock market as measured by the S&P 500 Index.  Their forecast range is 5-9%.

To read the entire report click here:  http://lpl-research.com/outlook/Midyear-Outlook-2015_Spread.pdf

 

 

5
Feb

Outlook 2015: In Transit

by admin in Global Investments

LPL_logo_541_SMALL_2x_25

As we look ahead to 2015, we see a year that will be marked by transitions. Likely changes in monetary policy around the world, the return of volatility, and the recent shift in the political balance of Congress could mean 2015 is a year that will have the global economy, markets, and central banks all on the move.

LPL Financial Research has identified significant elements that will be in transit in 2015, which include:

  • The U.S. economy continues its transition from the slow gross domestic product (GDP) growth of 2011–2013 to more sustained, broad-based growth. Ongoing progress in the labor market, an uptick in wage growth, and continued improvement in consumer and business spending have propelled an uptrend in U.S. economic output. LPL Research expects that inflation—which has historically accelerated as the economy moves into the second half of the business cycle—is poised to continue proceeding higher, but only modestly so.
  • Central banks around the world will also be on the move in 2015. In the United States, the economy is likely to continue to travel toward a point where the Federal Reserve (Fed) will begin raising interest rates, albeit gradually, for the first time in nine years. The Eurozone and Japan—the world’s second and fourth largest economies, respectively—could benefit, as central banks in those regions embark on more aggressive policy actions aimed at restarting and reaccelerating their long-dormant economies.
  • Washington shifts from a relatively quiet 2014 to take a bigger role in 2015. The Republican takeover in the Senate and approaching debt ceiling limit might provide the opportunity for some movement out of the gridlock that has plagued Washington in recent years.

Against this backdrop, LPL Research forecasts the following:

  • The U.S. economy is expected to expand at a rate of 3% or slightly higher in 2015. This forecast matches the average growth rate over the past 50 years, and is based on contributions from consumer spending, business capital spending, and housing, which are poised to advance at historically average or better growth rates in 2015.
  • Tempered by increasing levels of volatility, stocks may be poised to advance 5–9%. LPL Research expects continued economic growth, benign global monetary policy, and a more favorable policy climate from Washington indicate that the powerful, nearly six-year-old bull market should continue. This forecast is in-line with the average stock market growth of 7–9%, since WWII. Supported by improved global economic growth and stable profit margins in 2015, expected earnings per share growth for S&P 500 companies is 5–10%.
  • Expect flat bond market returns. With sustained improvement in economic growth, slowly rising inflation, and the approach of the Fed’s first interest rate hike, bond prices are likely to decline in 2015. LPL Research believes high-yield bonds and bank loans with their attractive yields can help investors manage this challenging bond market.

To help investors prepare for an expected market in transition, LPL Research has compiled timely advice into its Outlook 2015: In Transit publication. Transition, as is described in this publication, is just another word for change. The forthcoming change in the economic and market landscape in 2015 offers great opportunities, but also major challenges, likely in the form of increased volatility. However, as LPL Research forecasts relatively strong economic growth unfolding over the horizon, the bigger threat to most investment portfolios will be the pull of our emotions. It is human nature to weigh market struggles substantially more than the strong market returns between them. As investors, keeping our emotions in check when confronting increased volatility could be the key to potential success in 2015. With an investment strategy in hand and a destination in mind, we believe 2015 is poised to be a potentially favorable, though perhaps volatile, year for investors. View the complete Outlook 2015: In Transit.

https://lplfinancial.lpl.com/Documents/ResearchPublications/Outlook%202015.pdf