Category Archives: Fisher Investments Reviews: The Economy

Fisher Investments Reviews the Global Economy in February 2017

After a flat January, the MSCI World Index rose 4.5% in February.[i] Eurozone equities also advanced, rising 2.6%. Throughout the month, global politics fixated investors. In anticipation of the Dutch and French elections, angst over possible eurosceptic populist victories rose. But in our view, as we saw with the Dutch election, these fears overrate the likelihood European elections bring radical change—teeing up bullish falling uncertainty as they pass without calamity for 2017. Last year, falling uncertainty in the United States and the United Kingdom buoyed markets. We expect a similar eurozone-centered round this year.

Eurozone political uncertainty is high, clouding investors’ view of healthy and improving economic fundamentals. However, as this year progresses and elections come and go, uncertainty should fall—boosting markets and possibly contributing to non-US equities leading later this year. The first vote was mid-March’s Dutch parliamentary election. Geert Wilders’ eurosceptic, nationalist Party for Freedom (PVV) led most polls for months, stoking fears his election could trigger a euro or EU exit. But Prime Minister Mark Rutte and his center-right party won a plurality, placing well ahead of Geert Wilders’ far-right party. Moving forward, we expect gridlock—Rutte will try to negotiate a coalition government with three other parties. Yet, knowing the outcome alone should quell investor fears and reduce uncertainty.

In France, the nationalist, eurosceptic Front National’s Marine Le Pen officially launched her presidential campaign, and her strong showing in early polling ahead of first-round voting raised fears of France exiting the euro—a “Frexit.” Partly as a result, French 10-year sovereign bond yields hit their highest levels in 17 months in mid-February, with Portuguese, Spanish and Italian yields also rising. That said, French rates are only just above 1%—far from alarmingly high—and such volatility is fairly typical ahead of elections. 10-year UK yields rose before last June’s Brexit vote, only to fall once the outcome was known. Italian yields similarly rose before December’s constitutional reform referendum—only to fall thereafter.

More recent polling shows Le Pen’s support falling modestly. But either way, first-round polling and Frexit fears overrate Le Pen’s election chances—and her ability to enact radical change if she wins. In the first round, opposition to Le Pen is divided among several centrist candidates (most prominently, the new En Marche! party of Emmanuel Macron and Republicain François Fillon). This increases her chances in the first round. But she is very unlikely to win more than half the vote, triggering a second, head-to-head round. The head-to-head race unites opposition to her. Polls show either centrist candidate trouncing her in a second round—despite a nepotism scandal embroiling Fillon. Even if she does win, her ability to take radical action like Frexit or reinstating the franc is extremely limited, as she would need parliamentary support and a successful referendum to effect either change.

The likely result of gridlock in two core European nations should relieve fears of extremism roiling markets. As it did in the United States last year, getting resolution—no matter who wins—allows investors to refocus on fundamentals.

Speaking of American politics, media and many investors stateside remain fixated on President Donald Trump, but very few of his actions carry any material market impact. Trump signed five laws in February and issued a raft of mostly non-market-related presidential actions. The vast majority of presidential actions to date amount to Executive Branch personnel-related decisions, sociological matters or demands to study and review regulation. Two laws were narrow rollbacks of financial disclosure and environmental rules involving Energy and Mining firms, both carrying little market impact. Neither rule existed for even a year. We anticipate intraparty gridlock preventing or watering down most economically significant legislation, which should mitigate possible dislocations from radical policy change and relieve fearful investors in the US and abroad.

Amidst the political fixation, many overlooked economic data. Yet data released in February showed sound global growth continued, generally beating analysts’ expectations. While eurozone Q4 2016 GDP was revised a hair lower (to 0.4% q/q from 0.5%), the quarterly expansion extends the eurozone’s growth streak to 15 straight.[ii] The bloc’s four biggest economies—Germany, France, Italy and Spain—all grew. More recent data were also positive. February’s preliminary purchasing managers’ indexes for eurozone services and manufacturing (PMIs, surveys measuring the breadth of growth) rose to 57.2 and 55.5, respectively.[iii] (Readings above 50 are expansionary.) As a result, eurozone composite PMI reached 56.0, the highest since 2011 and sixth straight rise.[iv] Citigroup’s surprise indexes—gauges that relate data to professionals’ expectations—show frequent positive surprise.

Eurozone inflation accelerated to 1.8% y/y in January, and prices in all 19 eurozone nations rose—the first uniformly inflationary reading since 2013.[v] This should quell lingering deflation fears and possibly pressure the ECB to curtail its counterproductive quantitative easing program, which flattens the yield curve, constraining banks’ loan profitability. The yield spread was the largest contributor to the eurozone’s Leading Economic Index rising 0.6% in January, extending an uptrend.[vi] Recently rising yields suggest a bigger contribution in February.

UK Q4 2016 GDP was revised up to 0.7% q/q from 0.6%, but the media reception was negative.[vii] While private consumption rose 0.7% q/q and exports rose 4.1%, business investment’s -1.0% fall prompted more handwringing over Brexit’s negative impact. Many believe growth is too reliant on consumption, especially since retail sales fell -0.3% m/m in January, a third straight drop the media blamed on weak-pound-driven inflation. However, retail sales volatility is normal, and about 60% of UK consumer spending goes to services, where spending appears healthy. Moreover, inflation isn’t hot. At 1.8% y/y in January, headline CPI is still tame and the acceleration largely reflects rebounding energy prices.[viii] Core CPI, which excludes volatile inputs like energy, is more modest and only slightly up from readings commonly seen over the last couple years.

Revised data confirmed US GDP growth at 1.9% annualized in Q4, and early 2017 data show more growth.[ix] Retail sales rose 0.4% m/m in January, despite dipping automobile purchases, which still remain near record highs.[x]  Excluding volatile cars, retail sales rose 0.8% m/m. Unseasonably warm January weather depressed utility output, causing industrial production to fall -0.3% m/m. However, manufacturing and mining rose 0.2% and 2.8%, respectively, as oil drilling rebounded.[xi] While a boon for industrial output, rising oil production does little to help oil prices and Energy shares, which continue to face headwinds from elevated supply—hence our underweight. The Institute for Supply Management’s (ISM’s) January Manufacturing PMI rose 1.5 points to 56.0, while New Orders ticked up to 60.4, a two-year high.[xii] ISM’s Non-Manufacturing Index fell 0.1 point to a still-high 56.5 in January, suggesting ongoing service sector expansion.[xiii] With 465 S&P 500 companies reporting, Q4 earnings are up 4.9% y/y. Profits are rebounding as Energy’s drag wanes. As the year progresses, barring a renewed drop in oil prices, Energy should boost headline profits, as year-over-year growth calculations will be based on very low 2016 levels.

Japan’s tepid economic growth continued in Q4 2016. GDP grew 0.2% q/q (1.0% annualized), its fourth straight quarterly rise—a rare positive streak for a moribund economy.[xiv] January retail sales rose 1.0% y/y, another sign of life, though rising fuel prices played a big role.[xv] While data remain weak, investors seem to be souring on Japanese shares. If this sentiment weakens further, it could reach a point that any positive news could surprise to the upside, providing an opportunity for investors.

This update constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.

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[i] FactSet, as of 1/3/2017. MSCI World Index with net dividends, 31/12/2016 – 31/1/2017 and 31/1/2017 –28/2/2017.

[ii] Source: Eurostat, as of 2/3/2017.

[iii] Source: IHS Markit, as of 2/3/2017.

[iv] Ibid.

[v] Source: Eurostat, as of 24/2/2017.

[vi] Source: The Conference Board, as of 2/3/2017.

[vii] Source: FactSet, as of 2/3/2017.

[viii] Source: Office for National Statistics, as of 2/3/2017.

[ix] Source: US Bureau of Economic Analysis, as of 2/3/2017.

[x] Source: US Census Bureau, as of 15/2/2017.

[xi] Source: US Federal Reserve, as of 1/3/2017.

[xii] Source: Institute for Supply Management, as of 1/2/2017.

[xiii] Ibid., as of 3/2/2017.

[xiv] Source: FactSet, as of 2/3/2017.

[xv] Ibid.

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Fisher Investments Reviews: The Global Economy in January 2017

While political uncertainty fell in the US and UK in 2016, it is Continental Europe’s turn in 2017. France, Germany and the Netherlands have national elections scheduled, while Italy and possibly Greece may hold snap elections also. With populist parties polling strongly, many fear anti-EU forces are on the rise, poised to grab national power and take their respective countries out of the eurozone. However, this overlooks European politics’ factionalized, scattered nature—the parliamentary system, common in Europe, leads to many parties and platforms. The result: parties with minority support forge fragile coalitions and muddy the legislature’s ability to act. This gridlock is an overlooked positive that reduces legislative risks for stocks. Similar to the US after November, once investors realize their political fears are overstated, they can start appreciating other market drivers, like the eurozone’s steady economic growth—setting up a bullish upside surprise.

Global stocks were flat in January while eurozone stocks fell -1.0%.[1] Political developments in France and the Netherlands grabbed headlines, with their elections soon approaching. As the first round of France’s presidential election nears, recent polls triggered fear as the far-right, anti-EU Front National’s Marine Le Pen led. However, this seems like a quirk of France’s election system, as the first round splits votes among many parties. If Le Pen fails to win greater than 50% of the first-round vote, a second, head-to-head round will follow. Polls suggest a more than 20-point edge for her principal opponents, independent centrist Emmanuel Macron and center-right François Fillon—the latter despite a scandal that threatens his candidacy.

In the Netherlands’ March parliamentary elections, the Party for Freedom—a far-right, anti-EU party led by Geert Wilders—leads polls. However, they are expected to win only 33 of parliament’s 150 seats, and other parties have indicated they aren’t willing to partner with Wilders. The likely result is gridlock—no negative for a Dutch economy that doesn’t need reforms.

The eurozone’s underappreciated growth streak continues. The preliminary Q4 2016 estimate reported GDP grew 0.5% q/q (2.0% annualized), the 15th straight positive quarter.[2] More recent data are positive as well. Markit’s January flash composite purchasing managers’ index (PMI) hit 54.3, just below December’s 54.4.[3] Both Services (53.6) and Manufacturing (55.1) flash PMIs were also above 50, suggesting a majority of surveyed firms expanded.[4] Composite PMIs for two of the eurozone’s biggest economies—Germany and France—were also above 50.[5] Looking ahead, eurozone growth looks likely to continue, as money is moving around the monetary union. Broad money supply (M3) grew 4.8% y/y in December, just a touch off November’s 4.9%, while loan growth accelerated, with non-financial corporate and household lending rising 2.0% y/y and 2.2% y/y, respectively.[6] Also, The Conference Board’s Leading Economic Index (LEI) rose a robust 0.7% m/m in December, led by a pickup in the yield spread—another sign of loan profitability.[7] As uncertainty falls this year, investors should start recognizing the eurozone’s underappreciated growth, a bullish surprise.

Brexit uncertainty continued falling in January. Prime Minister Theresa May outlined her government’s exit plans, announcing the UK wouldn’t seek access to the EU’s single market and would pursue a new trade agreement with the bloc instead. Since May chose a “hard Brexit” instead of a “soft Brexit,” many worry the unknown path could be more economically damaging. However, the fears seem to be over semantics. If the UK and EU agreed to a new free trade agreement that was essentially single market access (or better) except in name, it would be a positive for both parties.

Besides May’s speech, in January, the UK Supreme Court also ruled Parliament must vote before the PM can trigger Article 50, which would formally launch Brexit negotiations with the EU. However, this is unlikely to prevent Brexit. Anticipating an unfavorable ruling, the May administration had a bill ready for Parliament’s consideration mere days after the court’s decision. Moreover, many lawmakers don’t oppose the PM, as doing so would go against the will of the people: On February 1, 498 Members of Parliament (MPs) voted in support of the government’s bill while 114 voted against. And on February 28th, the House of Lords voted to give the Government the authority to trigger Article 50 and begin the process of leaving the EU, further reducing uncertainty. Brexit’s developments should continue playing out slowly and publicly, gradually reducing uncertainty and surprise potential.

January economic data put Brexit’s non-effect on full display, too. Q4 2016 GDP grew 0.6% q/q (2.4% annualised), beating expectations.[8] Services—by far the biggest sector of the economy—rose 0.8%.[9] Manufacturing grew as well, but falling mining output offset it, bringing heavy industry’s net contribution to zero.[10] Though falling December retail sales volumes (-1.9% m/m, the second straight monthly decline) put a bit of a damper on the year’s end, this is a limited, volatile gauge.[11] During the year, retail sales volumes were positive six months and negative six months on a monthly basis. That volatility didn’t derail the UK’s overall 2016 consumption-driven expansion.

In the US, President Donald Trump continues to dominate the headlines, causing many to underappreciate solid economic growth and stocks’ healthy rally. Fears over Trump’s executive orders, trade policy, and comments over Mexico, Germany and Australia ruled the airwaves, but it was almost all either pure talk or sociology—not market-related. The new administration did formally permit two oil pipeline projects to advance, but we don’t expect these to have a major macroeconomic or market impact.

Trump also pulled America out of the Trans-Pacific Partnership (TPP) free trade agreement, but we’ve expected the collapse of this deal for more than a year. Trump’s TPP withdrawal was more the coup de grâce than a new, surprising move. Moreover, the deal’s failure amounts more to the absence of a positive than a new negative. Rising fears over Trump’s protectionist rhetoric tees up potential positive surprise when he does less than expected on trade. Already, talk is emerging about potential bilateral or smaller multilateral deals arising from TPP’s ashes. And, while he could change course, it is interesting to note that Trump’s claim he would name China a currency manipulator “on day one” of his presidency has yet to materialize.

The focus on politics overlooks solid US economic growth entering 2017. The US Leading Economic Index (LEI) rose 0.6% m/m in January and Institute for Supply Management Manufacturing and Non-Manufacturing purchasing managers’ indexes were strong, extending a solid run. While Q4 GDP growth decelerated to 1.9% annualized from Q3’s 3.5%, much of the deceleration was from volatile trade. Net exports subtracted 1.7 percentage points, mostly due to a reversal of a Q3 surge in soybean exports.[12] The less volatile, pure private sector components—household consumption, residential real estate investment and non-residential fixed investment—grew 2.4%, up from Q3’s 2.1%. With the yield curve positively sloped, banks are incentivized continue lending and businesses to investing.

Economic data also confirm Japanese growth remains tepid. Most data released in January don’t deviate from their trends. December inflation hovered around flattish, regardless of the gauge used: National CPI inched up 0.3% y/y, Core CPI (excluding fresh food) slipped -0.2%, and “Core-Core” CPI (excluding fresh food and energy) was flat.[13] All show the BoJ’s much-ballyhooed efforts to stoke inflation have fallen short. Trade-wise, December export values rose 5.4% y/y—the first positive reading since September 2015—while imports contracted again at -2.6% y/y.[14] However, on a volumes basis, which indicates the quantity of goods exchanged, trade fared better as exports rose 8.4% y/y and imports were up 3.6%.[15] Yet domestic demand overall remains flagging as December personal consumption expenditures fell -0.3% y/y.[16] Couple these weak data with the US’s pulling out of the TPP—which Prime Minister Shinzo Abe spent a good deal of political capital on—and sentiment toward Japan is plunging. While Japan’s near-term prospects don’t seem particularly bright, Japanese stock valuations have declined and foreign capital is leaving—signs investors have turned. Sentiment souring further could set up the potential for opportunities in the Land of the Rising Sun.

This update constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.


[1] Source: FactSet, as of 2/3/2017.

[2] Source: Eurostat, as of 1/31/2017.

[3] Source: Markit, as of 1/31/2017.

[4] Ibid.

[5] Ibid.

[6] Source: European Central Bank, as of 1/31/2017.

[7] Source: The Conference Board, as of 1/31/2017.

[8] Source: The Office for National Statistics, as of 1/31/2017.

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] Source: Bureau of Economic Analysis, as of 1/31/2017.

[13] Source: FactSet, as of 1/31/2017.

[14] Source: Japan Customs, as of 1/31/2017.

[15] Ibid.

[16] Ibid: FactSet, as of 1/31/2017.

Fisher Investments Reviews Last Week in the Economy: 12/15/2016

In the US, the remaining 19 S&P 500 companies reported Q3 earnings. ISM’s November Non-Manufacturing PMI rose to 57.2, beating expectations—more evidence the vast US services sector is chugging along quite nicely. November forward-looking new orders slowed to 57.0, while the mining industry reported growing activity in November. October trade data were mixed, as imports rose 1.3% m/m but exports fell 1.8% m/m. Exports of capital and consumer goods also fell, and total goods exports suffered their first drop since May. However, this doesn’t necessarily mean the trade rebound is over—ISM’s Manufacturing PMI showed export orders expanding in October and November.

In the UK, November Services PMI beat expectations, rising to 55.2. October industrial production missed expectations, falling -1.3% m/m. Manufacturing output fell 0.9% m/m and mining output fell -8.6% m/m. While most headlines interpreted manufacturing’s slide as evidence Brexit is making the UK economy more unbalanced, it’s consistent with the long-term trend. UK manufacturing has been choppy for years without derailing broader economic expansion, as services make up about 80% of total UK output. UK October trade data were mixed. Exports hit a record high, rising 4.6% m/m but imports fell -3.6% m/m.

In the eurozone, Q4 started off on a positive note, where October retail sales rose 1.1% m/m, beating expectations—the fastest m/m growth since November 2013. October German factory orders smashed expectations, soaring 4.9% m/m—the highest increase since July 2014. Orders for investment goods drove the increase, rising 7.2% m/m. Export orders rose 3.9% m/m, while domestic orders rose 6.3%. The ECB extended QE by nine months but reduced monthly purchases from €80 billion to €60 billion per month. The ECB also lowered the minimum duration of bonds purchased from two years to one year and removed the ban on buying bonds yielding less than -0.4%.

In Australia, Q3 GDP missed expectations, falling -0.5% q/q, the first contraction since Q1 2011. Australia has famously avoided recession since 1991, but they’ve had one-off dips in 2000, 2008 and 2011. While mining investment fell -10.6%, most of the blame goes to weather conditions, which weighed on consumption and construction.

In Japan, Q3 GDP was revised down from 2.2% annualized to 1.3%, missing expectations for a slight upward revision. Private capex fell 0.4%, exports were revised down to 1.6%, and while imports were revised slightly higher, they were still negative (-0.4%). Inventories and business investment were revised down as well.

Source : FactSet. This update constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.

Fisher Investments Reviews the Week in the Economy: 11/11/2016

In the US, 31 S&P 500 companies reported Q3 earnings, bringing the total number of companies reporting to 481. October bank lending accelerated to 6.1%. With the yield curve steepening in recent weeks, banks are well-positioned to continue supporting investment. 

In the eurozone, retail sales fell 0.2% m/m in September, beating expectations. While this is the eurozone’s second consecutive monthly decline, sporadic deceleration is normal. Eurozone retail sales also had a weak stretch in September and October 2015, before rebounding.

In the UK, industrial production fell 0.4% m/m, with North Sea oil rig maintenance bearing much of the blame. Manufacturing output rose 0.6% m/m, beating expectations. September’s strong manufacturing growth follows August’s modest 0.2% m/m rise, leaving July as the lone negative—strongly suggesting Q3’s weakness was largely due to initial post-Brexit referendum panic. Once people saw life carrying on as normal, businesses and output recovered.  September UK trade was mixed, but strong imports underscore healthy domestic demand. Export values fell 0.4% m/m, while import values rose 2.5% m/m and export volumes (goods only) fell -0.8% m/m, while import volumes (goods only) rose 4.7% m/m. The increase in imports shows the weaker sterling hasn’t dented demand for foreign goods. While fuel imports explain part of the rise, import volumes ex. oil still rose 4.2% m/m. Conventional wisdom says weak currencies make imports more expensive, hitting consumption. But so far, it appears the UK’s economy is strong enough to weather the pound’s drop, as the country imported a far higher quantity of goods even as currency hedges started expiring. 

In Japan, September core machinery orders fell 3.3% m/m. This is the second straight negative month, extending the choppy long-term trend—and providing more evidence Japanese capital expenditure has yet to meaningfully turnaround. Orders from overseas were positive, demonstrating domestic demand as the weak link.

Hong Kong Q3 2016 GDP rose 1.9% y/y, exceeding expectations and Q2’s report. Private consumption rose 1.2% y/y, and trade’s rebound continued. Goods exports and imports have grown two straight quarters, after a couple of contractionary periods. This is another sign of a nascent recovery in the global goods trade.

Source : FactSet. This update constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.