Xavier Denis, Societe Generale Private Banking
With rising corporate and consumer confidence in most major economies and little upward pressure on prices, global economic growth is expected to continue, said Chief Economist and Strategist Xavier Denis at the Societe Generale private banking conference in November.
The global economy is regaining traction with stronger manufacturing activity, robust private consumption and rising capital expenditures, he said, as he presented his insights regarding global trade and the emerging market, equity markets, and investments.
Decreasing global demand, especially due to slowing emerging markets, has weighed on the outlook for world trade. According to Denis, capital expenditure is below par, manufacturers have begun to “reshore” production, new processes such as 3D printing reduce the need for shipping, and globalization appears to go into reverse. However, global trade recovery has accelerated recently and should gradually improve further in the months ahead, he said.
The Eurozone continues to register above-potential growth and as a result, business confidence is high, job creation is robust, and consumer confidence is rising. Yet, downside risks remain in Spain and Italy with the Catalonia referendum and the rise of the anti-European Union populist Five Star Movement in polls.
Emerging economies should benefit from the upswing in global trade and improved economic growth. Within emerging markets, Asia-Pacific seems to show the best fundamentals, said Denis.
US equities are expected to remain underpinned by a strong recovery and solid growth in earnings-per-share, he added. Although few details have emerged so far, a cut in the 35 percent statutory corporate tax rate would boost profits; domestic companies with high effective tax rates will be the main beneficiaries while the US multinationals already pay lower rates. However, funding conditions will turn less favorable in the coming months as the Fed normalizes its monetary policy.
Eurozone equities briefly suffered from a stronger euro this summer but have recovered since, supported by the global economic recovery and the European Central Bank’s (ECB) accommodative monetary policy. Next year, the central bank is likely to reduce its asset purchases only gradually, keeping rates unchanged as wage growth remains contained. This will help earnings and margins improve further.
Although forecasts have been revised down over the past months following the euro’s rally, Earnings Per Share growth should remain strong. The IBES consensus is for 11.3 percent in 2017 and 8.4 percent in 2018.
Japan’s economy expanded in Q2 for the fifth quarter in a row and is now in better balance thanks to a recovery in both consumer and business spending. Deflation risks have receded but inflation remains modest and well-below the 2 percent target, allowing the Bank of Japan to keep an accommodative stance. Solid domestic and external demand will boost corporate profits while valuations remain attractive.
Corporate profits and margins in emerging countries will continue to benefit from stronger trade flows. Valuations are also attractive, especially compared to developed markets. However, the slightly slower growth expected in China in H2—as the impact of last year’s stimulus fades—and higher US rates could act as headwinds in coming months.
As a result, Denis advised selectivity with a preference for markets geared to the upswing in global trade and to the technology cycle, such as emerging Asia. He was also cautious on Brazilian and Russian markets as the positive impact of last year’s surge in commodity prices for resource producers has faded.
After four years of decline, capital spending is picking up. The broad-based rebound in business confidence since mid-2016 suggests that industrial production is expanding fast. Denis remains constructive on global equities. US equities have little to offer – their valuations are already too stretched. Brexit talks leave investors increasingly cautious on UK equities and neutral on Swiss equities as they will benefit less than others from the global recovery, said Denis.
