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Hedley Market Commentary - November 2019

Updated: Mar 11


Is the global economic growth story in peril?


Recent Months

Over recent months doubts have been cast over the ability of major global economic blocs to sustain their economic momentum. In the face of trade wars, sluggish investment, government debt levels, consumer financial strain, geopolitical uncertainty, the rise of nationalism, and more, are we really entering such a dangerous phase in our economic development?


The Years of Global Growth

With the 11th year of global growth about to come to an end, we have recently seen further trimming of economic forecasts as a number of strains take their toll. In Europe, there was a plea from the outgoing European Central Bank Head, Mario Draghi for more integration of European fiscal policy, as any substantial and coordinated fiscal stimulus by European governments has failed to materialise. The comparison is the USA, which has a true national integrated monetary and fiscal union and is therefore able to deal with financial crises much better.


Recent Slowdown

In the US, we have also seen a notable slowdown in growth, although this was arguably from an unsustainably high level and brought about by borrowing to sustain major tax cuts which, debatably, were unnecessary and unaffordable. Nevertheless, there has been a worrying trend of worsening economic data, so much so, that the US Central Bank felt that it needed to reduce interest rates to boost conditions.


Impact of Uncertainties

In Asia, we have seen Hong Kong move into recession, and mainland China continues to suffer from high levels of corporate debt and a strained banking sector. There is also strong evidence that the tariff wars are having a severe impact on exports with weaker factory activity feeding into a general slowdown of the Chinese economy, the world’s 2nd largest. Uncertainties arising from the trade fight are showing a clouding of prospects for growth in China and the region.

Problems?

There are undoubtedly many problems for governments, corporations and consumers to face and we have indeed witnessed 10 years of global expansion so that we should rationally expect a correction in global economic activity and corporate profitability. This normal economic evolution need not be overly traumatic (as the financial crisis of 2008/09 certainly was). However, it does require some level of cooperation by world powers to prevent a protracted and systemic risk, something which does look more difficult now, more than ever, with the nationalistic tendencies of China, Russia and the US and the populist politics of Europe.


Many already discounting some bad news

However, apart from US equities trading on a 2020 price-earnings ratio of 18x, many other global bourses have already been discounting some of this bad news. I have never seen the UK equity market so lowly rated, less than 12x PER yielding close to 5%; yes, there are certainly lots of problems to contend with here, and it may be that these are not resolved quickly, but it’s not a bad valuation level to start from …..is it?


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