To say the last year or so has been testing for investors across the world would be something of an understatement. So where do the global markets currently stand, what can we expect in the future and what issues should investors be considering? Marshall Gittler (pictured), Deutsche Bank’s Chief Strategist, and Clive Wright, Head of Executives & Entrepreneurs, discuss their views on the current market and the implications for wealth management…
Q: Has the world emerged from recession yet?
Marshall Gittler: It’s official: the recession is over – at least in the US. With the non-farm payrolls rising in January and March, the head of the National Bureau of Economic Research (NBER) Business Cycle Dating Committee said it was ‘pretty clear’ that the recession had ended (www.nber.org/cycles.html). Of course, although output started rising again in the middle of 2009, that isn’t the only definition of a recession. The NBER uses both GDP and non-farm employment, among other indicators, to mark peaks and troughs. According to their website, ‘the huge difference between the recent behaviour of output and employment reflects the unprecedented growth of productivity in 2009’.
Q: Is that the picture across the globe, or are there regional differentials?
MG: US productivity grew by 2.6% (in per hour terms) in 2009, according to The Conference Board, with employers cutting workers and working hours by more than the decline in output. The Conference Board predicts that US productivity will rise by 3% this year (www.conference-board.org/). In contrast, Eurozone output per hour fell by 1% last year. However, the Conference Board expects it to grow by around 2% this year. China was the global winner in the productivity race last year, with productivity rising 8.2% and forecast to rise 7.7% this year.
Globally, the worldwide recession caused a 1% drop in global output per worker, taking it into negative territory for the first time in 19 years. However, The Conference Board expects global productivity growth to be strongly positive again in 2010 (+2.2%) (www.conference-board.org/).
Q: What does this rise in productivity mean for corporate profits?
MG: The rise in productivity should be beneficial for profits and therefore for stocks too. In fact, US corporate profits were up 30.6% in 2009, the biggest yearly gain since 1983 (+39.6%). In the first half of 2009, the gains in corporate profits were due entirely to cost cutting, as nominal GDP shrank by 2.7%. But the gain in corporate profits in the second half of 2009 was due to top line growth, as nominal GDP grew 4.3%. The financial sector was the primary driver of profit recovery, but non-financial corporate profits grew by a sturdy 11.5%.
Clive Wright: Profits are important for the recovery because hiring cycles typically do not commence until companies have enough cash flow to begin expansion plans. The recent record growth in profits alongside rapid growth in capital spending augurs well for continued labour market improvement. That should help to dispel fears about the sustainability of the recovery and make investors even more confident in the outlook. Furthermore, if profits continue to rise, it would naturally be a bullish development for stocks in and of itself.
Q: With this in mind, what areas are investors looking at as part of their wealth management plans?
CW: Here within Deutsche Bank Private Wealth Management, we remain constructive on equity markets in general. Among the developed markets, we tend to favour the US and Japan over Europe. The recovery is established most strongly in the US, the labour market is likely to improve, the housing market seems to be stabilising and the political storms have calmed down (for now). Increasing productivity should continue to boost profits. Meanwhile, companies that have been holding off on investment out of fears about the outlook for demand and the availability of financing are starting to feel more confident about the future and are dusting off plans that had been shelved during the downturn. We look for a sustained recovery in the US that is likely to drive profits and stock prices higher.
Q: What about the Asian economies?
CW: In Japan, we are less optimistic about the domestic economy but quite optimistic about the prospects for the major exporters. Just as Japanese manufacturing was the worst hit as global demand collapsed in 2008, so too should it be a major beneficiary of the revival of demand. With its close links to the booming Chinese economy, Japan should do particularly well as global trade recovers.
MG: On top of this, as central banks around the world sound the ‘all clear’ bell and begin to normalise monetary policy, carry trades that have moved into US Dollars or Swiss Francs are likely to move back into Japanese Yen, in our view. The Yen carry trade should re-emerge, weakening the currency and providing a double boost to the major exporters.
Q: So what role could Europe play as part of an investment plan?
MG: In our view, Europe is likely to continue to struggle. The peripheral countries, starting with Ireland and Greece, will have to cut spending sharply in order to meet their debt and GDP targets. This will of course depress growth in these countries, but we should not forget the degree to which core Europe is dependent on trade with peripheral Europe. Europe as a whole will have a hard time growing while a major part of it is shrinking.
CW: Within Europe, those countries not in the Eurozone are likely to do best, in our view. Paradoxically, for all the problems the UK faces, its stock market may be one of the best performing in the region, simply because its companies are generally quite international and do not depend on UK demand.
This article first appeared in the CISX Bulletin Board, click here to download
