Developed Markets Reports Slow Growth- Cytonn Report

Developed markets witnessed a slow growth of 1.8 percent per annum in the first half of the year due to low commodity prices negatively affecting commodity exporters in emerging markets as well as the weak global trade compared to a growth of 1.9 percent in 2015.

According to a report from Cytonn Investment, the sluggish start of the year resulted to a similar downward global economic growth revisions by the World Bank and IMF in July to 2.4 percent and 3.1 percent from earlier projections of 2.9 percent and 3.2 percent, respectively at the start of the year.

In addition, the World Trade Organization (WTO) downgraded their outlook forecast for world trade growth in 2016 to 1.7 percent from 2.8 percent in April, citing a slowdown in China and falling import levels in the United States. This is the first time in 15 years that international commerce is seen to lag GDP growth of the world economy, having grown 1.5x faster than GDP in the long term, and 2.0x as fast since globalization picked up in the 1990s.

The report further stated that in terms of the four key economic regions:

US: The US Fed kept the Federal Funds rate constant in the 0.25 percent – 0.5 percent band. This is despite noting that economic conditions as well as the labor market, had improved, with the total number of jobs created increasing by 150,000 in August, and the unemployment rate remaining at a low of 4.9 percent, which is considered as full employment in the US economy. The main concern that the Fed had was the status of the other world economies, which are weaker, and their possible impact on the US economy

Europe: The region has slowed this quarter growing at 0.3%, following “Brexit”. Despite an aggressive quantitative easing programme of Euro 80.0 bn per month, which is aimed at stimulating the economy and increasing GDP growth, the region still suffers from low growth and low inflation

Asia: Concerns remain over economic growth in Asia, especially given the slowdown in China, and its wide-reaching effects on emerging markets, which depend on China as a key export destination for their raw materials

Emerging Markets: The regions are expected to grow at 3.5 percent, compared to 3.4 percent in 2015, with the commodity importers expected to do much better than commodity exporters. Concerns in this economic block remain the impact that global economic trends will have on these economies.

United States

The United States economic growth advanced by 1.4 percent in the second quarter, higher than the previously estimated 1.1 percent for Q2’2016. The upward revision was due to higher exports and higher consumption.

The US Federal Reserve left the Federal Funds rate unchanged at its meeting in September 2016 despite earlier expectations that it could raise the rates from the current band of 0.25 percent to 0.5 percent. The Fed noted that the case for an increase in interest rates had strengthened in recent months, but decided to wait for further evidence of continued progress towards its objectives. While most indicators point to a pickup in economic activity, including an improving labour market with rising job gains, strong household spending, and improvements in the housing sector; low levels of business fixed investments and persistently low inflation continue to necessitate caution.

The stock market performance improved on account of the extended accommodative policy by the Fed, with the S&P 500 having gained 6.2 percent since the start of the year, despite corporate earnings falling by 4.3 percent y/y, marking the 5^th consecutive decline in quarterly earnings. In terms of valuations, the Cyclically Adjusted Price/Earnings (CAPE) ratio is currently near historical highs at 26.8x, far above the historical average of 16.7x, indicating an overvaluation of the market.

Cytonn Investments noted that they expects the US market to remain volatile with possibilities of a decline in equities market from the current levels owing to the upcoming presidential elections in November and the possibility of a rate hike by the Fed in December.

Eurozone

The Eurozone experienced a slowed economic growth at 0.3 percent in Q2’2016 down from the 0.5 percent growth experienced in Q1’2016. This was mainly attributed to the poor performance of major economies such as France and Italy which realized almost flat GDP growth. Manufacturing activity in the Eurozone remains strong, measured by the Purchasing Managers Index, which was at 52.6 in Q3’2016, similar to the 52.6 recorded at the end of Q2’2016. The market expectation for Eurozone Q3’2016 GDP growth stands at 0.4 percent for the quarter, and a y/y projection of 1.7 percent, which is pegged on improved consumer spending.

The European Central Bank (ECB) met in September and maintained the base lending rate at 0.0 percent, and the rates on the marginal lending facility and deposit facility at 0.25 percent and -0.4 percent, respectively. However, the ECB reaffirmed its plans to run quantitative easing to March 2017 or beyond if needed, calling on Eurozone governments to step up their structural reforms and fiscal policies in order to collectively achieve their goals. The inflation rate remains low at 0.2 percent, which is quite low compared to the ECB target of 2 percent.

The Euro Stoxx 300 has been on a downward trend, losing 12.2 percent YTD due to the uncertainty surrounding “Brexit”, the inability of Eurozone to stimulate inflation back to the target of 2.0 percent and the announcement of no additional stimulus which has further rattled the markets.

The company expects the ECB to continue their QE programme, and possibly even extend the Programme beyond March 2017 in case the uncertainty following the Brexit dents the Eurozone recovery and the low inflationary environment persists.

China

The Chinese economy experienced a growth rate of 6.7 percent in Q2’2016 which was unchanged from Q1’2016 and against an estimate of 6.6 percent. This could be attributed to the stimulus measures put in place by the Government and the Peoples Bank of China to add more liquidity to the economy and spur bank lending.

China still managed to contribute 1.2 percent towards global growth until H1’2016, being the single largest individual contributor to global GDP growth. The first half performance in 2016 was supported by increased government infrastructure spending, accommodative monetary policy, and an increase in consumer spending. The continued implementation of structural reforms should help China overcome risks that include weak export demand, falling manufacturing investment and a slowdown in credit growth.

China experienced increased level of imports in the month of August, rising 1.5 percent for the first time in two years’ time while exports declined by 2.8 percent. This was mainly as a result of sluggish world demand on China’s exports. The Shanghai Composite Index, however, remains one of the worst performing indices having lost 18.3 percent year to date.

China’s economy is showing fresh signs of strength, from increased business confidence to an expansionary factory gauge reading, according to the earliest private indicators for September. We expect to see the Chinese economy growing within the government targets of 6.5 percent – 7 percent for the rest of the year amidst the shift to a service-based economy from manufacturing and export based.

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