International Equity Commentary January 2013
February 15, 2013
of Thomas White International
Global Growth Optimism Lifts International Equities Further
International equity prices sustained the uptrend in January, helped by data releases that supported the growing optimism over healthier global economic growth. Though the U.S. and U.K. economies declined unexpectedly during the fourth quarter of last year, the pace of growth improved in several Asian countries, including China, during the period. U.S. lawmakers have given themselves more time to resolve the debate about the federal government’s debt ceiling, thereby easing concerns over a blow to economic growth, at least for now. There were no significant negative developments in Europe during the month of January as policymakers largely maintained their positions and expectations about future negotiations to solve the fiscal crisis, even as the region’s economic conditions remained fragile. After the strong gains towards the end of last year, emerging markets have underperformed so far this year.
Fourth quarter GDP growth data for Asian economies released so far have mostly been positive. The Chinese economy expanded at a faster than expected pace during the last quarter, helped by higher domestic spending and investments. Higher demand from China also helped other countries in the region, such as Taiwan and the Philippines, to report better than forecasted growth rates for the fourth quarter. For the month of January, manufacturing output data in Asia also showed no evidence of slackening, suggesting that the recovery that started during the second half of last year remains intact. In Europe, while the aggregate output continues to contract, the manufacturing sector showed signs of improvement in January as business sentiment across the region turned more optimistic. The unemployment rate in the Euro-zone appears to be stabilizing, though it remained at record levels in December.
The unexpected fourth quarter contraction briefly heightened concerns about the health of the U.S. economy, one of the key pillars of the ongoing global recovery. However, the decline was mostly due to a steep fall in government spending on defense, lower inventory gains, and weaker than expected exports. On the positive side, growth in consumer and business spending exceeded expectations, despite the uncertainties that surrounded the fiscal cliff negotiations as well as the adverse effects of Hurricane Sandy. U.S. manufacturing activity expanded further in January, while consumer confidence surveys suggest that the payroll tax hike has not made a big dent on sentiment. Job gains for the month of January were healthy, even after the significant upward revisions in job additions for earlier months, suggesting that the housing sector recovery has lifted construction employment. These positive trends in the U.S. augur well for the growth prospects of several leading economies in Asia and Latin America, especially since European demand continues to be restrained.
The prospect of a currency war between major countries has attracted the attention of investors in recent weeks, especially since the new Japanese government launched measures to boost domestic demand and fight deflationary pressures. These policy initiatives and public statements have led to an appreciable correction in the value of the yen against other currencies, and lifted the competitiveness of Japanese exporters. As expected, the yen’s decline is increasingly becoming a concern for other countries such as Korea and Germany that directly compete with Japan in the international markets. Despite a moderate correction this month, the Korean won has retained most of its gains from the last year while the euro continues to appreciate against the U.S. dollar, despite the fiscal crisis and recession in Europe. Brazil has long been a vocal critic of the aggressive monetary measures in the developed world, which have strengthened currencies of other countries. There are growing apprehensions that the subdued global demand would encourage more countries to pursue aggressive currency devaluation to protect their exports. However, as global manufacturing with component sourcing from multiple countries continues to become more popular, the net impact of such policies is likely to be difficult to estimate.
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