Investors had a lot of information to digest this past week, from the start of a massive QE program in the Euro zone to a new economic plan in China and finally another strong employment number in the United States.
Each one of these events not only has specific implications for their own regions but, more importantly, implications for the global economy and investing. You need a global perspective to be a successful investor. The interrelationships of economies and financial markets around the world could not have been more evident than in this past week.
Let’s take our usual look at what happened, region by region, and then discuss the implications for investing.
The events impact all asset classes, from bonds to stocks to currencies and commodities. This was an important week, as the path forward became clearer, as well as having confirmed our asset allocation and the composition of our portfolio. The perception of the implications of these events often differs from the reality of what takes place, so you need to take in all the information. So let’s step back, reflect and invest accordingly … not trade.
The ECB took center stage last week as the size, scope and specific bonds to be bought were unveiled as part of its massive quantitative easing program. Mario Draghi, president of the European Central Bank, committed to buying $66.5 billion per month of bonds of all durations until at least September 2016. I found it amazing that Draghi also mentioned that the ECB would buy bonds with negative yields. (Greek debt is excluded from the buyback.)
As expected, European bond yields hit record lows last week and the Euro fell below our initial target of 110 to the dollar. We shorted the euro at 126 and it is in print. Our next target for the euro is par with the dollar. We believe the euro will base later in the year as the European recovery becomes more self-evident and interest rates firm up. In fact, the ECB raised its growth forecasts for 2015 to 1.5 percent for 2016 to 1.9 percent and for 2017 to 2.1 percent with inflation staying below the ECB target of 2.0 percent.
It is the direction of the European economies that counts more to me at the moment than the magnitude of growth. There is clearly positive change afoot. Here, perception and reality are pretty close.
Chinese Premier Li Keqiang, at the National People’s Congress last week, officially lowered the country’s growth forecast to around 7 percent for 2015, which was a disappointment to many but no surprise to us. The general perception for most investors is that China has entered a growth recession, so commodity prices, interest rates and the yuan all fell. The government acknowledged the challenges it faces and will implement plans and new reforms over the medium and longer term to support annual growth above 6 percent, which is needed to keep unemployment down and incomes rising. Working off past excesses, strengthening the banking system and reducing pollution will restrain growth over the near term.
The perception is that China may be falling in the same economic trap as Japan did 10 years ago, but we strongly disagree. We believe that the reality will be a new norm in China, with growth above 6 percent for the next few years. What country wouldn’t like that? By the way, February exports climbed much more rapidly than anticipated and the trade surplus exceeded $60 billion just for the month. China has the needed reserves to implement positive and sustainable change.
Meanwhile, it was an interesting week in the United States. While there are many signs of economic weakness due in part to the harsh winter hurting retail sales, a decline in factory orders for the sixth month in a row, a strong dollar penalizing exports while boosting non-energy imports and a West Coast port strike, employment data reported Friday was surprising strong.