May 2016 | www.selectasset.com
May 2016 Market Update
With U.S. media focused on the raucous U.S. presidential election primaries, 2016 opened with a widespread feeling of uncertainty among economists. However, by the end of the first quarter most analysts were feeling somewhat upbeat. The U.S. economy is growing, although at a slower rate than in 2015. With consumer spending as the main catalyst and a stronger housing market, real GDP is expected to rise 2.3% in 2016 (compared with 2.4% in 2015). Business spending is not expected to improve much due to the continued strength of the U.S. dollar and weak demand in foreign markets. Unemployment remains low and some are predicting it may be as low as 4.6% by the end of the year while inflation is expected to increase from 0.7% in 2015 to as much as 2.4% this year. The U.S. Federal Reserve, which closely monitors unemployment and inflation rates, remains very cautious. Following its most recent meeting, the Federal Open Market Committee (FOMC) announced on April 27 that “economic activity will expand at a moderate pace” and inflation will “rise to 2% over the medium term.” Sooner or later, what the FOMC refers to as “the transitory effects of declines in energy and import prices” are expected to dissipate, but it is not certain that the overall effect will produce the results necessary to warrant policy changes. Consequently, the Committee decided to “maintain the target range for federal funds rate at 0.25 to 0.5 percent.” This was no surprise for anyone, so now the question is, will the economic outlook, both domestically and internationally improve enough to induce the FOMC to announce a rate increase at their next meeting in June? On the corporate scene, Apple Computer announced, as expected, that its quarterly earnings for the quarter ending in March declined for the first time in 13 years, as iPhone sales dropped for the first time. Apple shares immediately fell more than 4.5%.
Tax evasion scandals rocked the UK in April following the release of the “Panama Papers,” a document leak on tax haven schemes, which named Prime Minister David Cameron’s father, and perhaps muddied the water for the Prime Minister’s campaign to convince voters to remain in the European Union rather than heading for the “Brexit.” With the referendum scheduled for June 23, uncertainty over the outcome remains. Aside from the vote, the government and most economists agree that UK GDP growth will average about 2% this year. Inflation, while remaining low, might edge up to the 2% targeted later in the year and that the job market, as a whole, should improve in the years ahead as health, education and business services continue to expand. Taking a cautious view, the Bank of England remains steadfast in its general position that no change in interest rates is advisable at this stage, and any future rate changes should be gradual. The problems created by slumps in China and other emerging market economies continue to impede growth in exports, while volatility in financial markets remains. There was some good news for over 2 million low wage earners working in retail and hospitality services when the government’s decision last year to raise the hourly minimum wage from GBP 6.70 to 7.20 took effect on April 1. However, the steel industry received some bad news when India’s Tata Steel, Europe’s No.2 steel producer, announced plans to sell its UK operations, which currently employ some 15,000 workers. The news followed a series of layoffs by Tata and two other firms. Currently several bidders, including many UK firms are in the running to buy Tata’s UK business and keep the jobs afloat. The industry as a whole has been struggling against falling global steel prices and increased competition in cheaper imports from other EU countries and China. The percentage of people working in steel is a tiny portion of the UK workforce of 31 million, but many people argue that a shrinking steel industry will adversely affect all manufacturing sectors, which account for roughly 10% of the UK’s economic output.
From a purely economic viewpoint, little has changed in the 2016 outlook for the 28-country EU or 19-country Eurozone. Economists believe that if no improvement is seen in the emerging market economies, especially China and Brazil, lackluster exports will continue to drag down gains made in the region’s domestic markets. At best, GDP is expected to grow by 1.5% in 2016, but continuing economic uncertainty and political instability in some countries, such as Spain, Ireland, Greece, and even France, is fueling a widespread mood of caution. Some countries, however, are standing out. Germany, even while plagued by domestic political and economic tension over the Syrian refugee crisis, continues to be the region’s best performer with GDP growth at 1.6%. France, which has benefited from a weak euro and low energy prices, is currently being rocked by strikes, ranging from transit workers to teachers unions, protesting President François Hollande’s proposed changes to the country’s labor laws. The government believes the changes are needed to reinvigorate the economy, but the unions are in fierce opposition. Still, economists are predicting growth of 1.3% in 2016. Italy’s economy, which made only tiny gains in 2015, is also not expected to do better than 1.0% growth this year. In currency policy, the European Central Bank decided at its April 21 policy meeting to stand pat on interest rates, perhaps underscoring the general mood of caution.
Just five years after a huge earthquake and tsunami hit Japan’s northeastern coastline, another powerful quake struck the western island of Kyushu in mid April. Fortunately, there was far less loss of life and destruction this time, but once again mother nature cast a shadow over the future well-being of the country whose outlook for this year and 2017 remains subdued. Japan’s trade balance is a case in point. In March, both exports and imports continued to decline. Nominal exports in yen fell 6.8% month-on-month from last year, while imports contracted 14.9% annually thanks largely to the lower energy costs. This left the country with a monthly surplus of 755 billion yen; the strongest it’s been since October 2010. However, the trade deficit for the 12 months up to March was still 1.1 trillion yen. The Bank of Japan’s quarterly Tankan (Short Term Economic Survey of Enterprises in Japan) business sentiment index fell from 12 to 6 in the first quarter (Q1) of 2016 (January-March) compared to the last quarter (Q4) of 2015. Because the number is still well above the threshold of zero, it indicates that optimists continue to outnumber pessimists. However, the Tankan’s “forward-looking forecast” index (looking 3 months ahead) dropped from Q1’s 7 to 3 in the second quarter (Q2), indicating serious doubt about where a strong yen, weak overseas demand and the Abe government’s ability rekindle growth is taking the economy. Japan’s NIKKEI 225 Stock Market Index Forecasts published on April 27 added fuel to the unease by predicting a steady drop in the stock market average in Q2, Q3 and Q4. On the corporate scandal front, Mitsubishi Motors Corporation, Japan’s sixth largest automaker, disclosed that it had been rigging mileage data for at least four of its models for the last 25 years. The company quickly announced a third-party committee will be thoroughly investigating the details, however analysts are predicting that this scandal, which follows a defect cover-up a decade ago, will be very difficult to survive.