InvestmentsNov 24 2014

Difficulty navigating bumpy economic terrain

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This year has been characterised by strident monetary policies and a fixation on growth rates, with the stagnating eurozone and Japan’s reforms coming under particular scrutiny.

While Shinzo Abe’s initiatives have been largely considered positive for Japan’s economy, the country is technically in recession again following disappointing data in the third quarter.

Following publication of the data, Mr Abe decided to call a snap election for December and delayed another sales tax rise, which had been expected next year.

Christopher Mahon, director of asset allocation research at Baring Asset Management, comments: “In Japan, corporate earnings continue to do well and have been able to shrug off the weak domestic data coming from Japan over the summer. This resilience is in marked contrast to, say, Europe, where earning expectations continue to move down. The robustness of profitability is due to the boost in margins driven by the weak yen – a relationship we expect to continue.”

Also under the spotlight is Europe, where sluggish growth has been reported in Germany and France, unsettling markets and investors. While both countries recorded positive GDP growth in the third quarter of this year, the figures have hardly inspired confidence.

France’s economy managed 0.3 per cent in the three months, which was an improvement on the 0.1 per cent contraction in the previous quarter. But Germany’s GDP growth of 0.1 per cent after its economy shrunk 0.1 per cent in the second quarter saw it narrowly miss a technical recession.

“Consumer spending appears to have saved Germany, as business investment continues to flounder, possibly in reaction to rising tensions between Europe and Russia,” explains Azad Zangana, Schroders’ European economist.

“In more positive news, Greece was the fastest growing economy in the eurozone, posting 0.7 per cent growth in the quarter and 1.4 per cent growth compared to a year earlier,” he adds.

“Overall, while the latest GDP figures are slightly better than expected, they continue to paint a picture of a weak eurozone economy that is struggling to break out of this sluggish growth environment.”

Geopolitical tensions surfaced at the November meeting of the G20 leaders in Brisbane, Australia, after reports of Russia’s president Vladimir Putin leaving the summit early as G20 leaders confronted him over his actions in Ukraine.

Pat Ryan, manager of the Lazard Global Equity Income fund, observes there are several regions facing headwinds. Unrest in Ukraine “is certainly part of the reason why western Europe in general has underperformed this year,” he says. “[Europe] is a fragile economy just beginning to recover and the sanctions on Russia is one way to slow and perhaps even reverse that recovery.”

But he believes the regions to keep the closest eye on are emerging markets. He goes on: “There is the broader view that with the Federal Reserve now finishing with quantitative easing, that will have a negative impact on emerging markets.

“We think that view is somewhat simplistic. People are thinking back to the 1990s when we had periods when the Fed hiked rates and bad things happened in emerging markets.”

“[But] things have changed since then – economies are bigger, governments are better run, foreign currency reserves are bigger, there are no more dollar currency pegs.”

As the rest of 2014 and the start of 2015 unfolds, perhaps the only certainty is that there will be further macro and political surprises.

Ellie Duncan is deputy features editor at Investment Adviser