Yesterday’s USA Today article entitled “Warning lights flash on global economy’s dashboard” shows the timing of multi currency investing when it noted that the US economy grew last quarter at an annualized rate of 3.3% while both Europe and Japan are headed for recession.
A falling euro and Japanese yen creates opportunity.
This week we are looking at the strategic multi currency economic outlook developed by Jyske Bank’s Strategy and Research Team to get a better grasp on multi currency equity values as they develop.
Yesterday’s Multi Currency Strategy USA message looked at the US economy.
Today we look at the euro zone. Here is what Jyske’s Strategy and Research Team says:
“The winds blowing over the euro zone are becoming increasingly cool – almost chilling. This weather change seems to be pronounced. The year came off to a strong start with growth of 0.7% q-o-q, but then we saw a weak level at -0.2% in Q2. However, special circumstances such as the mild winter, etc. had an impact on the two quarters. However, the average growth of 0.25%, q-o-q, in H1 is a definite signal that the growth is on the decline and is somewhat below the long-term growth rate.
Together with a slowdown in the global growth, the high inflation has had a slowing effect on growth. And with the prospects of continuing high inflation – which very well may have peaked this time around at 4.0% – we do not expect that in the foreseeable time the ECB will lower its interest rate to stimulate growth. The bank is still very concerned indeed about second-round effects in the form of accelerating wage increases. We do not expect that the inflation rate will get close to 2% until mid-2009.
A much needed stimulant in respect of the purchasing power of the households has been seen in the form of falling commodity prices for oil and food. Also, there are prospects that wage increases will accelerate, which will support private consumption and thus economic growth. On the other hand, the historically strong labour market is about to turn around, which indicates that we will get a slightly weaker growth stimulant from this market.
Exports are under pressure due to weaker global growth, weak competitive power due to the strong euro and rising unit wage costs. Therefore the expected weakening of the euro will be most welcome with a view to boosting competitive power and exports, as the increase in the unit wage costs does not seem to have peaked.
For quite some time, the growth in investments has been solid, yet there is hardly any doubt that the weak housing market is beginning to have an impact. It is expected that business investments will come under pressure. The companies are under pressure due to the tightening of credits, accelerating wage increases and increasingly gloomy growth prospects. This will put a damper on investment growth over the coming quarters.
We may also see relaxation of the fiscal policy -particularly in Spain – where there are indications that measures will be taken to assist the ailing construction sector and economy. Thanks to the decent public-sector surplus, this should be possible. In Germany there have been many rumours about tax cuts in 2009, but for the time being Angela Merkel maintains that such measures will not be seen until 2010.
Due to the weaker-than-expected growth scenario seen in the euro zone and the somewhat protracted slowdown in growth in the US, we have downgraded our growth estimate for the euro zone to 1.3% for this year and 1.1% for 2009.
As it is expected that the inflation rate will remain high for quite a while yet and as the unit wage costs are expected to increase, we do not believe that the ECB will attempt to boost growth until Q2 2009. We expect that over the three last quarters in 2009, the ECB will announce three interest-rate cuts of 0.25 percentage point.
Economic growth in Japan is in the doldrums.
The export sector has been hit by the global economic slowdown, and there are no prospects that the domestic economy will take over the role of growth engine.
Private spending is under pressure by poorer employment prospects, and falling real wages due to rising inflation and low nominal wage growth erodes households’ purchasing power. In addition, the weaker prospects of private spending and export investment are a burden, and profits in the business sector are squeezed by high commodity prices. The fact that approx. 50% of Japanese exports go to Asian emerging markets – which we expect will maintain a growth rate in line with the trend – still supports the export sector despite the slowdown in the global economy.
All in all, we believe that the slowest growth will materialise in Q2 and Q3 2008, but that growth will subsequently only gradually be on the increase. For 2008, we expect to see a growth rate of 1.1% whereas economic growth will in 2009 come to 1.3% and hence stay slightly below the potential growth rate.
Even though consumer prices have risen significantly by Japanese standards (2% y/y) and are now at the highest level for ten years, there are no signs that inflation is generally on the rise. Underlying inflation (excl. of food and energy) and wage growth will hence remain around zero, and despite the increase in consumer prices Japan has therefore still not left the shadow of deflation.
We expect that the Bank of Japan will leave its interest rates unchanged at 0.5% for the coming quarters. An interest-rate hike is not expected until the second half of 2009, when either growth has picked up again, or core inflation begins to show signs of a clearly positive trend.”
These facts are significant in helping value investors spot multi currency value.
Weaker economies will encourage lower interest rates which will weaken the currencies more. A weaker euro and yen now will create buying opportunities for the next drop of the dollar.
We are looking at specific recommendations and why borrowing yen may once again make sense in our Multi Currency Portfolio Course.
The USA Today article “Warning lights flash on global economy’s dashboard” also says:
Emerging markets, once the first places to feel an economic chill, remain hot. Continued expansion in developing countries such as China, India and Brazil mean companies from tractor maker John Deere to medical device producer Covidien expect strong financial results.
43% of Johns Deere’s $7 billion third quarter sales came from abroad.
Tomorrow’s message looks at Jyske Bank’s Strategy and Research Team’s analysis of emerging markets.
Until then, good global investing.
Join me and Thomas Fischer from Jyske Global Asset Management in North Carolina to learn more about economic trends.
We’ll have lunch at the farm and enjoy the leaf change.
This is the most beautiful time of the year on the Blue Ridge.