International Equity Commentary – December 2012
Thomas White International
January 17, 2013
International Equities Gain Further on Improved Global Economic Outlook
International equity prices made robust gains in December, as further improvement in economic trends across most regions lifted the outlook for 2013. Policymakers in the U.S. managed to put together an agreement at the last minute and averted the ‘fiscal cliff’, one of the major risks that had restricted investor sentiment during earlier months. In Europe, though economic signals remain largely weak, the further fall in bond yields of the troubled countries has helped sustain optimism about resolving the region’s fiscal crisis this year. Emerging market equities outperformed during the month on signs that the economic growth outlook for those countries has improved on sustained expansion in domestic consumption and stable external demand.
After several months of weakness, global manufacturing activity saw a modest expansion in December, helped by gains in the U.S., the U.K., and most emerging economies. Surveys also suggest improvement in business sentiment and manufacturers are now expected to step up production to rebuild inventories, as the demand outlook has improved. However, the Euro-zone and Japan continue to see declining manufacturing output. Japan is yet to see a recovery in exports, even as shipments from most other countries in Asia have started rising again. Japanese exports declined further in November, as shipments to Europe and China were significantly lower from a year earlier. After the healthy gains during the previous month, growth in exports from China was also lower than expected in November on weak European demand.
As the Euro-zone economy remains weak and is now expected to see a recovery only during the second half of this year, sustained growth in the U.S. is of vital importance to rest of the world, especially to countries that are reliant on exports. Moderate, but sustained, growth in U.S. consumer spending, helped by the housing sector recovery and improved labor market conditions, have already started reflecting positively on export shipment data from select Asian countries such as China and Korea. The agreement to avoid the fiscal cliff has been received positively, though the increase in payroll taxes is likely to restrict spending by lower income consumer groups. The relatively lower fuel prices, when compared to the second and third quarters of 2012, should also support consumer confidence in the short term. However, protracted negotiations over increasing the federal government’s borrowing limits could hurt business sentiment and restrict new investments and hiring. This could potentially cloud the outlook for exports from Asia and Latin America.
Economic activity remains subdued in Japan, as the significant fall in exports during 2012 has restricted domestic demand as well. Though the yen has corrected in recent weeks, offering some relief to exporters, lingering political tensions with China could limit shipments to that country. To help shore up domestic demand, the new Japanese government is expected to announce a large fiscal stimulus program shortly. It is also anticipated that the Bank of Japan will continue with the quantitative easing measures it initiated last year. Among the large emerging economies, domestic consumption growth is expected to sustain as most of the fiscal incentives announced last year remain in place. Low inflation risks are expected to allow central banks in the emerging countries to keep interest rates at the current levels, or bring them down further when necessary. The improved growth outlook for the emerging world, especially China, has led to a moderate recovery in prices of industrial materials such as iron ore in recent weeks.
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