June 2016 | www.selectasset.com
June 2016 Market Update
In the USA, summer “officially” begins began for many people with the Memorial Day holiday weekend (May 28-30), but many are still focused on the economy. U.S. Federal Reserve Chair Janet Yellen stated on May 27 that a Fed rate increase would be appropriate “probably in the coming months” if the economy and labor market continue to strengthen. Not by coincidence, the “second” estimate released May 27 by the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) noted that U.S. real gross domestic product (GDP) increased at an annual rate of 0.8% in the first quarter of 2016 thanks in large part to increases in consumer spending for services, such as housing, utilities and health care, and nondurable goods (including food, gas and other energy expenses). Residential investments and state and local government spending also increased. Overall corporate profits, which decreased 7.8% in the fourth quarter of 2015, but dropped 5.7% during the last four quarters, made a small recovery of 0.3% in the first quarter of 2016. Most notable was a 4.0% increase for domestic nonfinancial corporations. On the other hand, the BEA noted that overall business investment decreased, exports declined, farm and nonfarm private inventory investments declined and federal government spending (notably in defense) also declined. However, some analysts see change in the wind, citing that commodity prices in particular may be set for an upswing. Goldman Sachs and then Citigroup both predicted, in late May, that oil prices will rise sooner than expected due to a slide in production in non-OPEC countries and a change in OPEC strategy initiated by Saudi Arabia. Actually, the price of Brent crude oil, the international benchmark for crude, rose to $50 a barrel in May, which is an 80% rise over the low point set in January. As for stock prices, some economists say they are now very high. According to Ned Davis Research, the median price-to-sales ratio of stocks listed on the S&P 500 is 2.2, which is higher than it was in 2000 and 2007. The Shiller Price-to-Earnings ratio is at 26.2, its highest level since 2007. And on the technology front, robots are getting upper hand as Apple supplier Foxconn Technology confirmed that it has replaced 60,000 workers with robots in a single factory in China.
As Britain approaches its June 23 vote to decide whether to remain in the EU or head for the exit, the media has been filled with “what if” scenarios. However, according to The Economist, opinion polls are showing that Brexit won’t happen. To some economists that may be reassuring, but with London being the financial capital of Europe, many are wondering what the banks will do if the polls are wrong. If voters choose to leave, Britain would still remain an EU member for two or more years while exit procedures are gradually carried out. If Brexit were to happen, economists expect exchange rates and liquidity to be impacted immediately, making the financial services, including accounting and legal, to be big losers. British trade as a whole could also fall by between GBP 67 to 92 billion a year, according to a study by Frontier Economics. It is no wonder then that the government, the Organization for Economic Co-operation and Development, the International Monetary Fund, and the British Treasury department have all been predicting severe damage to the British economy should Brexit happen. In the meantime, the economy continues to grow, albeit very slowly. In the first quarter of 2016 GDP increased by 0.4% and is expected to reach 2% for the year. The unemployment rate remains low at 5.1% and consumer price inflation is exceptionally low. At 0.3% it is way below the target of 2%. As for the stock market, the FTSE 100 Stock Market Index, which reached 6263 points on May 30, is expected to continuing rising to 6280 in the second quarter (Q2) and then the third and fourth quarters.
In a region as diverse as the European Union, economic forecasting is very complicated, especially these days, with these when there is so much data being interpreted by so many experts. At the beginning of the second quarter the European Commission predicted growth of 1.8% this year for the 28-country EU and 1.6% for the 19-country Eurozone. In mid-May FocusEconomics, which surveys several hundred experts, said that the pace of growth may be slower in the Eurozone, reaching 1.5% in the first quarter and 1.4% in 2016 as a whole. More recent data published on May 24 reported that the Purchasing Managers’ Index was at a 16-month low, which indicates that business activity has lost some momentum. For example, analysts pointed to a slight downturn in services growth. On the other hand, the European Central Bank expects the Eurozone economy to expand 1.7% in 2016 and reach 1.9% in 2017. Data from Germany and France indicate those two economies, unlike other countries in the region, have improved, both in the services and manufacturing sectors. On May 30, German stocks climbed to their highest point in one month, likely based on investor hopes that a weak euro will help German exporters. In France, despite fuel strikes and protests against labor law reforms, a surge in consumer spending and increased business investment during the first quarter helped to push GDP up 0.6% over the previous quarter. However, in anyone has forgotten, the Eurozone is still grappling with the on-going crisis in tiny Greece, now in the middle of its third bailout program. At this stage, Greece’s debt to GDP ratio is around 177%, or roughly EUR 321 billion. Spain and Portugal have also failed to keep their budget deficits below the EU rule of 3% of GDP.
Prime Minister Shinzo Abe enjoyed a brief moment in the international spotlight as host of the G7 Summit held in Ise in Japan, May 26-27, which included a groundbreaking ceremonial visit (and speech) by U.S. President Obama to Hiroshima. However, in spite of all the political goodwill, Abe did not get much of an economic boast. He stated that the global economy was facing a situation similar to 2008 and appealed to G7 leaders for increased government spending to fend off an impending crisis. No commitments were made and, in fact, Christine Lagarde, head of the International Monetary Fund, stated that the world was “no longer in a 2008 moment.” Abe was worried enough to announce, after the Summit, his intention to delay a sales tax hike, scheduled for April 2017, until late 2019. The tax hike was an important part of his economic program to jump-start Japan’s economy, so his decision to delay could fuel media criticism of his overall program, known as “Abenomics.” Some analysts are now predicting that Japan’s GDP will grow by only 0.6% in 2016, while others are predicting 0.5%. Core inflation, which the government and the Bank of Japan would like to see go up to 2%, may remain around 0.3%. Although core machinery orders rebounded in March, suggesting renewed business spending, the country’s Manufacturing Purchasing Managers’ Index (PMI) declined to a three-year low in May. The upward swing in Japan’s balance of trade, which began early this year, is expected to continue. Although Japan recorded an 823.47 billion yen surplus in April, the largest since March 2010, it was achieved largely because imports dropped faster year-on-year (23.3%) than exports (down 10.1%). However, much depends on potential increases in energy costs and any improvement in China’s economy. In Japan’s troubled auto industry Nissan Motor Co. announced that it has agreed to purchase a 34% stake in scandal ridden Mitsubishi Motors Corporation, a move widely welcomed by analysts and the public. Unfortunately, this was soon followed by a disclosure from Suzuki Motor Corporation that, like Mitsubishi, it had used improper fuel economy testing methods.