Global Overview: January 2012
Thomas White International
February 6, 2012
Global outlook turns more optimistic
Concerns over a significant global downturn have faded further as economic data trends from the last days of 2011 and the early days of the current year remain healthy. Global manufacturing activity expanded again in January, helped by output growth in the U.S., China, Japan, India, and Australia. Manufacturing output also improved in the Euro-zone, helped by continued gains in Germany. U.S. labor market conditions advanced again in January, raising hopes for increased consumer demand that will also help export growth in other economies such as China.
Global equity markets have responded positively to the improved economic optimism, and equity prices across all regions ended January with strong gains. Emerging markets that had come under selling pressure during the second half of 2011 led the recovery, with double-digit price gains in most regions. U.S. oil prices remained close to the $100/barrel level though U.S. natural gas prices declined on weaker than expected winter demand. Other commodities, especially industrial metals, also had a strong start to the year, erasing their price decline last year.
Global industrial investment flows unaffected by economic uncertainties
Despite the challenging global economic outlook, foreign industrial investment flows to the developing countries rose to a new record in 2011. According to the United Nations Conference on Trade and Development (UNCTAD), aggregate industrial investment flows to the developing countries were $755 billion last year. Nearly $550 billion went to new industrial projects while mergers and acquisitions accounted for the rest. Among the regions, Latin America saw the biggest increase in inflows over the previous year, followed by Europe, including Russia. Industrial investment flows into the developed countries, especially in Europe, also increased as companies disposed non-strategic assets when the economic environment deteriorated. UNCTAD is optimistic that global industrial investment flows will increase further to $1.6 trillion this year from $1.5 trillion in 2011.
Patent expiries may restrict revenue growth for select drug companies while outlook for equipment manufacturers rebound
In the pharmaceuticals industry, the expiration of patents on some of the blockbuster drugs will likely restrict revenue growth for some of the large companies in the sector. Drugs that have gone off-patent recently or will do so in the near future include anti-platelet drugs used to control blood clots, asthmatic drugs, and statins such as Lipitor, the world’s biggest selling drug until now, that are used to treat high cholesterol. Generic manufacturers are ready with their far cheaper versions of all these drugs and, accordingly, price realizations for the large manufacturers will likely drop. Though some of these manufacturers have strong product pipelines, it may take several years for new drug lines to build volumes. The outlook for revenue growth is better for biotech drug manufacturers that continue to bring out products at a faster rate. Nevertheless, the sector outperformed the broader markets in 2011 as most companies continue to enjoy healthy margins and have maintained dividend payouts.
Industrial equipment and capital goods manufacturers will likely benefit from the expected rebound in construction activity and industrial capacity investments in the U.S. Large equipment manufacturers appear optimistic about improved U.S. domestic demand this year, after several years of decline. At the same time, demand from the large emerging markets is anticipated to remain robust even as orders from Europe are likely to be weak. Adding to the optimism of equipment manufacturers, higher oil and other commodity prices are likely to sustain investments in exploration and extraction.
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