International Outlook: In search of back-to-school specials
Geopolitical eruptions continue to grab headlines, masking what we believe to be a more telling and positive story as we head into the second half of the year: a global synchronized recovery buttressed by accelerating growth and very accommodative central banks. There are weak spots, to be sure, including Argentina, Russia and France. German manufacturing activity also is sluggish, raising concerns about the expected improvement in its economy going into the fall. Still, the overall picture is one of above-trend global growth.
The latest OECD Composite Leading Indicator for OECD countries reached its highest level since October 2011, with two-thirds of countries reporting composite leading indicators above their long-term averages. The JP Morgan Global Manufacturing PMI also was firmly in expansion territory, just off June’s four-month high. Manufacturing activity expanded in three-fourths of the gauge’s countries, while the percentage of countries with rising manufacturing PMIs hit a six-month high.
Of course, what happens in the world in some ways still comes down to what happens in the U.S., and the news there is good. Last week’s initial estimate of real second-quarter growth came in at 4%, well above estimates, as consumer spending, factory activity, business investment and even housing (albeit more slowly) rebounded from the first-quarter’s weather-driven (and upwardly revised) GDP contraction of 2.1%. Other reports last week also showed July auto sales, while slipping slightly from June, still running near their best pace in eight years; July manufacturing, as measured by the ISM gauge, hitting a 3¼-year high; and nonfarm jobs, even with July’s slight miss, expanding by more than 200,000 for the sixth straight month, the best stretch since the late 1990s.
Asia’s big three
Across the Pacific, it appears Japan is shaking off April’s consumption tax increase that likely caused its economy to contract in the second quarter for the first time in two years—the official number is due next week. Japan’s full-year GDP forecast has started to rise again, led by improvements in corporate investment and production. In South Korea, where manufacturing activity improved in July but was still modestly subpar, we’re encouraged by a new 41 trillion won ($40 billion) stimulus package aimed at boosting domestic second-half consumption.
Elsewhere in Asia, China’s economy has avoided a hard landing and should grow at a 7.3% rate this year on accelerating industrial output—two key manufacturing gauges, the government PMI and the private HSBC/Markit PMI, rose more than expected in July to 27-month and 18-month highs, respectively. New confidence-building measures also are generating optimism. These include recent government reforms such as Shanghai and Hong Kong exchanges working to allow previously banned cross-border ownership; upticks in China leading and economic surprise indicators; and house-purchase reforms to speed mortgage access.
In Europe, the policy-setting governing council of the European Central Bank (ECB) today left policy unchanged and continued to point to an uneven recovery, but a recovery nonetheless. Growth is coming from strong manufacturing led by the U.K. and Ireland but also including Sweden, Spain and the Netherlands. The ECB also pointed to better jobs, improved bank lending and encouraging retail sales data while acknowledging the volatile backdrop. Overall, the eurozone PMI held steady in July, with all countries except France and Greece expanding.
In peripheral Europe, we are seeing new evidence of government and central bank actions supportive of growth in several economies. In Turkey, the AKP-led government is pressuring the central bank to reverse monetary tightening to aid investment and make borrowing easier. In Spain, GDP gained momentum in the quarter and retail sales improved. Even among Europe’s emerging economies, July manufacturing activity was robust in Hungary and the Czech Republic, further evidence that Europe and her periphery is in a period of broadening recovery.
The bottom line: It’s back to basics on the international investing front. With economic fundamentals improving across a range of countries, and with attractive equity valuations relative to the U.S.— Germany, China, and South Korea markets, for example, are 35% to 60% cheaper relative U.S. equities on a book-value basis—we believe the time is right to sift through overseas markets for back-to-school specials, i.e., compelling long-term opportunities.