Jason Stather-Lodge, CEO of OCM Wealth Management
China is growing faster than many feared
The key theme for the next few weeks is calm. The data out of China last week confirmed that the growth rate is still running at an annualised 6.9% (greater than anticipated) and therefore not the meltdown to circa 5% and below that many were predicting in the market rout towards the middle of August. The Peoples Bank of China (PBOC) also provided more stimuli on Friday morning, when they as well as liberalizing bank deposit rates, reduced interest rates. Within these numbers, we continue to see a movement towards growth in consumer spending and services and a slowdown in industrial spending for the 43rd month in a row. While this does nothing to support the commodity prices, it further supports our faith in the consumer services and banking sectors. Let’s not forget that China is the second largest economy in the world and has a growing population that is becoming increasingly affluent.
Its consumer spending will therefore have an impact on the balance of the Chinese economy in that it will become more self-sustaining and less reliant on exports.
Return of the European consumer?
There is still uncertainty over exports to the whole region from the developed economies and that is something that has to be factored into asset allocation as we move through the rest of 2015 and into 2016. If we look a little closer to home then the European consumer sector is showing some strength, as confirmed last week when we saw positive data out for European car registrations. The big winners were Daimler, BMW, Nissan and Fiat, all selling 15%+ more cars than twelve months ago and all have had strong starts to 2015. Interestingly, sales were below average in the core European countries and the UK, but spectacular in the periphery states. Ireland, Spain and Portugal all saw year-on-year sales growth of over 20% and Italy was not much lower. Whilst it is fair to say that the full impact of VW’s problems has yet to be felt, it does clearly show the return of the consumer in Europe, especially in the much maligned periphery countries.
The knock on effect of lower costs of living, via oil and food price falls, is clearly being seen at the forecourt.
US earnings season & Banking sectors
We are now in the key reporting season and it’s a competitive environment in which the winners and losers are becoming apparent. Wal-Mart, for example, has fallen c15% since it reported its numbers, revealing the impact of their wage increases on the bottom line. Nevertheless, US consumer data was positive and it has now put Wal-Mart is now in a good position with little debt, a AA credit rating, a low price-earnings ratio and also a very high dividend pay-out ratio that yields 3.25%. The only thing really missing is growth and because Amazon is taking their market share, the outlook on Wal-Mart is suppressed. I use this merely as an illustration of how the US corporate world is now positioned and how different this is to say 2007. This time around balance sheets are on the whole in good shape and look capable of containing any large shocks, not that we are forecasting any. Elsewhere, continuing the mixed bag theme we saw big winners in companies like Johnson and Johnson and Intel, whereas IBM and others showed dramatic falls as they were hit hard for missing estimates, in part due to the strength in the US$. Overall, none of this is telling me to change my positive stance on the US as it looks to relate to individual companies, some of which are now starting to look good value.
Banks in the US have now mostly reported their earnings, and again, this has seen a mixture of results. Some like Morgan Stanley have struggled, whilst Goldman Sachs has continued to power ahead which is another example of where one brand is taking market share over another. Bank of American beat estimates and shows forward growth, and both JP Morgan and Wells Fargo reported solid earnings also. These three are more key barometers of the American economy and are showing that, on the whole, things are in pretty good shape. All eyes will now be on European banks in the next week and I expect results to confirm what we are already seeing - that a positive uptick in economic development will be met by better performance in financials as a whole.
Let’s not forget that China is the second largest economy in the world and has a growing population that is becoming increasingly affluent.