Global Market Commentary

March 2, 2015

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Five Bull Markets Around the World — Thanks To Central Banks

The U.S. — We’re Bullish
The U.S. does not have a QE program at all now, but the U.S. stock and bond markets are getting support from the dovishness of the Fed minutes. In spite of much improved economic growth in the U.S. with capital spending, jobs, and reshoring all improving substantially, still the FOMC (Federal Reserve Open Market Committee) talks dovishly about raising interest rates. We anticipate that the first moves up in interest rates will be
modest, and begin in third quarter 2015 or possibly even in early 2016.

Europe — We’re Bullish

Europe had two major events in the past week and the market took off: a ceasefire deal (however temporary) in Ukraine, and a four-month kick-the-can exercise in Greece. Clearly, Greece will return as a problem in the future, but it is hard to miss that investors have begun, as of last week, to view Greece as a problem child who is eternally petulant, but not a big enough problem to affect the rest of the European family. Rather investors seem to be willing to let the Greeks make their own decision about leaving the Euro, and let Greece experience the consequences. Investors do not feel Greece’s exit would cause contagion within Europe. We agree.

Even if some radical political parties in Spain or other countries win votes following the Greek example, countries leaving the Euro would face several years of pain and bankruptcy before righting themselves. Only those countries whose citizens work and pay taxes will ever right themselves. So voters may vote in anyone they want, but new governments will have to behave rationally or face dire political amd economic consequences.

Most importantly, we are only days away from the beginning of European QE (thank you, ECB) and it is obvious that the European markets are attracting a great deal of money from investors in other parts of the world. A last very positive point is that after four years of disappointing corporate profits, many European firms have rationalized their operations and cut costs — to the point where Q4 2014 corporate profits were up about 6 to 8 percent and we expect profits to rise by over 10 percent in 2015. Very bullish — but remember to hedge the Euro; longer-term it can go much lower.

India — We’re Bullish

We wrote about India last week. In summary, lower interest rates (we expect the central bank to cut interest rates twice more before July), strong GDP growth in 2015 (possibly as high as 8 percent), and corporate profits up in the double digits. We anticipate about 14 percent corporate profit growth. All the foregoing will likely combine to make India the world’s fastest growing economy in 2015. What is not to like?

The Indian budget will be presented on February 28. We remain optimistic that Modi’s government will take action to stimulate foreign direct investment, improve infrastructure, decrease the irrationality of retroactive tax increases (at the state level), and provide new capital for Indian banks — which means banks will be free from government interference in lending. The overhang of stifling bureaucracy and rent-seeking will be further pared back. If minor changes are made, Indian stocks will go higher. If major changes show up in the new budget, Indian stocks could go much higher.

China — We’re Bullish

The Peoples Bank of China (PBOC) regularly and secretively adds capital to government-owned banks with capital problems. In addition, the PBOC has lowered reserve requirements for banks, allowing them to lend more money to stimulate economic growth. We anticiapte that there will be more such actions. China is not as
cheap as it was a year ago, but it is still cheap compared to other growth markets. Even if Chinese GDP only grows at 4 percent, corporate profits will grow at 8 to 10 percent, which creates a positive investment climate. We are bullish on China, but we realize that government can also tighten if they believe that certain sectors of the economy are overheating. Clearly, China is trying to steer investment money away from real estate and into stocks, and investors are listening and taking action by selling their second and third houses and buying stocks.

The U.S. Dollar — We’re Bullish

The ending of U.S. QE in late 2014, combined with stronger U.S. economic activity in the last few months, has strengthened the US dollar. Eventually, this will negatively affect U.S. exports, but in the intermediate term we see this as an attractor of foreign money into U.S. bonds and stocks. Thus, we argue that less QE is better for the U.S. Dollar — and as Europe, China, and many other countries engage in QE (or as we have called it for years, QE everywhere), we believe money will flow into U.S. securities markets and the U.S. Dollar.

Investment implications: Central banks continue to be investors’ friends, although not everywhere. We see bull markets in the U.S., where the Fed is still dovish; in Europe, which is launching QE and has seen some relief of anxiety surrounding Greece and Ukraine; India, where Narendra Modi is making strides at implementing a vigorous pro-business, pro-development agenda; and China, where demand for stocks is high. We also see continued strength for the U.S. Dollar, and by extension, demand for U.S. Dollar-denominated assets.

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