15 July 2019
Fans of HBO's hit series Game of Thrones are familiar with the motto of the show's premiere episode, "Winter is Coming". It is also being used as a warning about the global economy. Photo: HBO
Fans of HBO's hit series Game of Thrones are familiar with the motto of the show's premiere episode, "Winter is Coming". It is also being used as a warning about the global economy. Photo: HBO

Winter is coming?

Global stock markets have lost their luster. China’s A shares are the worst performers, while Hong Kong stocks are lethargic. Dow Jones and S&P 500 have pared their gains to 2-3 percent after last week’s correction. Nasdaq is still up 8.5 percent year-to-date.

As commonly observed, stock markets usually move six to nine months ahead of the real economy. Does the recent stock market performance indicate that corporate earnings are falling back? Or that the global economy is heading towards a recession?

Possibly not. US corporate earnings have surged by over 20 percent, partly due to the Trump administration’s tax cuts, and are expected to rise another 5 to 10 percent next year.

In China, corporate earnings also increased by 10 percent in the first half, although growth is likely to be dragged down by uncertainties in the second half. Still, earnings are expected to rise next year.

Investors are likely to be frustrated if they only rely on “bottom-up” micro research to select what to buy.

Stocks in several sectors, such as pharmaceuticals and those benefiting from China’s “consumption upgrade” trend like cosmetics, outperformed in the first half. However, most of these stocks have given back their rallies since the beginning of the second half.

I believe we can only find the “last stocks standing” in the US stock market. These include “FANG” (Facebook, Amazon, Netflix, and Google) and a few other internet and tech companies like Apple, Microsoft and Nvidia.

However, share prices of Facebook and Netflix have weakened since the third quarter. Rocked by privacy breaches and management issues, Facebook has slumped 12 percent year-to-date or nearly 30 percent from the peak. Almost US$200 billion of its market value has been wiped out.

Since “bottom-up” micro research seems unhelpful in picking investment targets, how about a macro analysis of the global economy?

Last year’s synchronized global growth was one of the biggest market stories, and it has extended its run into this year. But the global growth picture has shown a divergence. China’s growth stayed above 6.5 percent, while Europe and Japan also posted stable growth. India’s growth rate even accelerated above 7 percent.

Most central bank governors and finance ministers are worried about escalating trade conflict between the United States and China. The International Monetary Fund has revised down global GDP growth to 3.7 percent for the next two years, down 0.2 point from an earlier forecast. 

It sees China’s growth at 6.6 percent this year, but slowing to 6.2 percent in 2019.  The United States will also see its GDP growth slow from 2.9 percent this year to 2.5 percent next year, the IMF said.

In line with such concerns, The Economist magazine picks “Next Recession” as its cover story for this week, discussing when, why and how serious it will be, as well as the measures we can take. 

The magazine noted that the most likely cause of the next recession is politics rather than the economy. Global debt has exceeded its level during the 2008 financial crisis. The next recession may not as hard as the last one, but the biggest issue is that central banks and governments don’t have enough ammunition to respond and fight the next economic downturn.

Based on experience, interest rates are usually cut by 4 to 5 percent during a recession. However, current rates are still low, even in the United States, the world’s leading economy. And the Federal Reserve’s normalization pace is unlikely to be adequate to get interest rates high enough before the next recession. Besides, the European Union and Japan are still mired in zero rates, which means they have little room to respond by way of monetary policy if a recession comes.

On the interaction of inflation, interest rates, and GDP, I believe the essence of inflation has already changed dramatically after the massive monetary easing over the last decade. And the major reason is that the energy bottleneck has already been broken. The uptick in oil prices over the last two years is mainly due to political factors, instead of supply and demand imbalances.

Besides, despite the slowdown in productivity growth worldwide, the GDP measurement has failed to accurately reflect the quality improvement of products and services in the economy. That is, the advancement of technology has not been taken into account. 

Speaking at the International Monetary Fund-World Bank annual meetings plenary in Bali last week, Indonesia’s President Joko Widodo warned that “winter is coming”, a reference from the popular television series Game Of Thrones.

He said many economies are struggling with various woes stemming from escalating trade tensions and industrial shocks. That sounds scary.

Nevertheless, I would advise everyone not to worry too much about the market. After all, it takes eight seasons of the show for winter to arrive! 

This article appeared in the Hong Kong Economic Journal on Oct 16

Translation by Julie Zhu

Chinese version 中文版]

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Eddie Tam is the founder and CEO of Central Asset Investments.

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