Aggressive monetary ease can limit the global economic downturn while increasing the value of financial assets, but we need truly comprehensive structural economic and regulatory reforms as well as trade agreements to make global growth meaningful. We were not surprised to see the OECD last week cut growth forecasts for 2019 and 2020 to 3.3% and 3.4%, respectively, with most cuts coming in the euro area. Inflation forecasts were also lowered.
We have not changed our view, one we had since January, that global growth would emerge in the middle of the year and begin to accelerate as we move into and through 2020. The main reasons for our optimism are: [1
Let's look at what is happening in the most important economic areas that justify our view:
- The United States has become the central land that affects our view. There is no doubt that the Fed will pause hiking for the whole year and will probably end up relaxing its balance within a month or two. We are not sure if the Fed will cut prices to stop the dollar, but it would be a smart move if done. Fed's main goal has shifted to protect expansion rather than contain inflation. There were several financial figures reported last week that need to mention. The rise in the trade deficit in December to $ 59.8 billion and for the year to $ 621 billion had a lot to do with our domestic economic strength, weakness abroad and fear of additional tariffs in January 2019. No surprise that the trade war actually increased deficit last year . The employment numbers reported on Friday were a shock to everyone, including us. Without going into detail, we are convinced that the numbers were off-base. Instead, we focus on the ADP number reported on Wednesday, and showing jobs increased by 183,000 in February. Weekly unemployment is still in record highs and there are over 7.3 million jobs. We consider the December report as an unknown to reality and are completely rejected. It is clear that GDP in the first quarter will be the lowest point for the US economy in 2019. Interest-sensitive sectors such as homes are already showing improvements with the recent decline in mortgage rates. There is no doubt that consumer spending will remain strong (just look at Costco (NASDAQ: COST), Target (NYSE: TGT) and Walmart (NYSE: WMT) figures), as well as capital spending on technology that will boost future productivity. And finally, there are increased prospects for trade agreements being signed with China, Japan and hopefully the Eurozone this year. 2020 could surprise on the upside. Don't forget that Trump will do everything possible to boost the economy and stimulate the financial markets before the presidential election in 2020. And the Democrats run a big risk moving too far to our left in our opinion. The US stock market is still undervalued today, as we expect S & P's earnings to increase by at least 5% in 2019, while the 10-year treasury is below 3.0%.
- China's national conference last week was very revealing, but not surprising to us. China lowered its economic growth target for the year to an area of between 6% and 6.5% as expected. Premier Li Keqiang offered plans to stimulate the domestic economy through a combination of tax cuts and major spending projects. Trade was an important topic of discussion that it was clear that trade conflicts had seriously damaged China's economy. Ironically, last week it was reported that China's exports had fallen by almost 20% in February from a year ago, while exports fell 26% to the US. We take these figures with a grain of salt as well, as exports were unusually high in November and December in advance added tariffs in January. Weak imports were affected for the same reasons and do not reflect the weakening of domestic demand in China. We are also confident that China's economy will improve as we move through the year and take advantage of the massive flood of additional liquidity and tax reductions, including a sharp reduction in VAT. And what if it is a trade agreement with the US that we expect? It is important to note that the Chinese government is trying to include speculation in its financial markets by allowing a sales recommendation on Friday at one of the most prominent insurance companies.
- Japan's economy recovered 1.9% in the fourth quarter after declining by 2.4% in the third quarter. Private consumption increased by only 0.4% as wage growth remains weak and net exports actually punished growth by 0.3%. Japan's Cabinet Office just reported that the latest compound business terms fell for the third straight month to its lowest level since June 2013. Japan desperately needs global trade conflicts in the end. The BOJ cannot do more than it already is, and it is just as difficult for the government to increase its deficit from these high levels. Japan's economy will crush until global trade improves. We expect Japan to reach a trade agreement with the US before the end of the summer, which will improve growth potentials accelerated later this year, especially if China and the United States are now also making an agreement.
- We remain negative with regard to the outlook for the euro area despite the political change in the ECB last week. The ECB promised to keep interest rates at the current level through the end of the year and will not give the banks a new loan round since 2016. We do not believe that the eurozone can grow by 1.1 per cent in 2019 until the area can get its action together. Brexit, political problems in Italy and Spain, and most importantly, the trade conflicts with the United States, cover all of Europe's prospects. Germany needs to look to the neighbors who allow higher expenses and lower taxes, even if it means increasing deficits. It is no surprise that the region is in great need of structural reforms to better compete globally. Although we believe that all European governments recognize the risk of disadvantages, including increasing deflationary pressures, and will work together to promote growth, including a trade agreement with the United States
Aggressive monetary ease has taken the risk of a long-term recession from the board, but will not lead to accelerated economic growth before trading agreements are reached. Companies keep their hands in their pockets until they have some certainty about the trade policy. We are confident that commercial transactions will lead to more capital expenditure and hiring. China, Europe and Japan are harmed far more than the US by trade issues, and therefore have much more to gain when agreements are reached.
We have written since October in October that the risk of inconvenience was unimaginable, and that it was about time for power to be the right things. Trump has disturbed the status quo in so many ways. While we disagree with many things about him, including his ways, we agree with many of his goals. Who can argue for no tariffs, no grants, no stolen IP and equal? Who can argue that the US bears all the research costs for drugs?
Change is difficult and hiccups occur along the way, but the playoffs can be worth the disturbance. The alarm bells ringing around the world increase the chance that trade conferences will be reached this year, which will lead to an acceleration in global growth into and through 2020. It is important to note that no one thinks this, so we do not pay for it either. We believe that US markets are undervalued today, even without trade agreements. We are less sanguine in other markets with less trade agreements being reached.
Our portfolios are more diversified than we can remember without an overall theme. Each investment is led by good management by winning long-term strategies and resources to see it happen. While we continue to hear too much influence in the system, it's really not the company's America, whose balances have never been better. However, we are concerned about the acquisition of government debt everywhere.
We own many drug companies that benefit from new product flow, rising margins and cash flow; industrial and capital goods companies with a volume growth of 1.5-2 times GDP, rising margins and large free cash flow generation; technology including semis at a fair price to growth that generates huge free cash flow; cable companies with content such as Comcast (NASDAQ: CMCSA) and Disney (NYSE: DIS); Housing-related companies are HD that will benefit from insufficient offers and low mortgage rates. low cost industrial commodity companies that generate large free cash flow; And many, many special situations where internal development will close the gap between current price and intrinsic value. We do not own any bonds that we expect the yield curve to rise later this year, and we double the dollar, even though we expected its long-term strength.
Review all the facts; pause, reflect and consider mindset shifts; look at asset allocation with risk management all the time; do independent research and … Invest accordingly!
Editor's Note: The abstract bullets for this article were selected by Seeking Alpha editors.