Medium term policy uncertainty weighs on risk sentiment
Global financial markets are reconciling structural, cyclical and policy data. Economic imbalances in the U.S., Europe and China continue to create episodes of risk-seeking and risk-aversion. In the coming months, markets will likely face political uncertainty stemming out of Greek/French/U.S. elections and a pivotal government change in China. On the other hand, it is very likely that monetary authorities will continue their aggressive stance to cushion systemic, credit and cyclical risks; especially as inflation remains in check.
On the U.S. front, the broad trend in employment remains encouraging and our expectation is for the jobs market to continue its gradual recovery as the skills mismatch gets worked off. As this condition improves, we expect labor market participants to move from low to higher paid jobs. In addition, we expect U.S. manufacturing to experience a renaissance in the current decade as U.S. corporations seek low energy costs and higher skilled labor. Secular trends in automation and U.S. shale oil/gas exploration are strong underpinnings for the manufacturing sector.
From a productivity growth perspective, we expect the corporate sector to boost its labor and capital expenditures in order to grow and meet end-demand. We expect the technology and industrials sectors to be agents of productivity enhancement. On the credit front, we are encouraged by the healthy loan demand by both large and small businesses. For both small businesses and banks, stability in housing prices is key and we believe the housing market is in a bottoming process.
To be sure, U.S. fiscal and entitlement spending issues have to be addressed effectively. In all likelihood, policy vaccum from now until the elections will probably create uncertainty for businesses and households. Yet, as we highlighted in past articles, we expect the energy sector to lead the economic recovery in the next few years. Rapidly rising domestic oil production and abundance of natural gas are important boons to the nation’s wealth and competitive position; especially against major trading partners such as China. As we can see below, crude oil imports continue to decline and households have benefited from lower natural gas bills. This cushions to an extent the rising cost of driving miles. An improving labor market along with low energy costs are likely to improve consumer confidence and spending.
On the European front, the recent flare-up in sovereign Spanish/Italian yields will likely prompt the ECB to resume its direct purchases of peripheral sovereign debt and to continue supporting money supply growth. The challenge in Europe is mainly a matter of competitiveness and internal economic divergences will ultimately be resolved when leaders decide to have a true economic union and common fiscal policy. Clearly, national politics are a big obstacle but ultimately the market will force major decisions in the Eurozone such as a major devaluation of the currency and/or a sharing of debt restructuring losses.
In conclusion, we continue to navigate our way through the ensemble of risks and opportunities that the market presents to us and we maintain our nimbleness in order to take advantage of good risk-reward entry points. Our current portfolio positioning favors income generating instruments and defensive sectors such as utilities, consumer staples, healthcare and telecoms.
Christos Charalambous CFA
Senior Strategist
christos.charalambous@edgewealth.com
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