By Jim O’Neill, Chairman, Goldman Sachs Asset Management.
Markets and Moods.
So, here’s the situation. The mood is grim. A lot of economic data has turned grimmer, which makes many people so bearish about many things, markets included. Much of the “mood” centres on a sense of hopelessness about Europe, with the risk on/risk off mentality seemingly suggesting that it is impossible to differentiate markets as an investor, and so on. Yet, when I started to write this Viewpoint, before the release of the US June nonfarm payrolls, year-to-date, the S&P is up 8.75 pct, the DAX more than 10 pct, the Nikkei 6.7 pct, and the Hang Seng 7.4 pct. Even India is up over 13 pct. Yes, Italy and Spain are down year-to-date, but not everyone else’s markets are. China is close to flat, Brazil is down a bit, but the N-11 markets are up by around 12 pct.
A superficial conclusion might be that markets, as wrong as they sometimes can be, yet again, are more on the ball than many that talk about them. Furthermore, the relative differences between some countries and markets suggests that people can still differentiate. Many of the markets’ relative performance would seem to accord with what is currently going on with their economies. So, the relative strength of the DAX within Europe and compared to the US market, albeit marginally, kind of makes some sense. Similarly, the strong underperformance of the Club Med marketsrelative to other developed markets makes some sort of sense.
Sticking with this theme, it is particularly intriguing to see the Indian equity market as the strongest of the BRIC country markets, despite the fact that many people, me included, would have more concerns about the Indian economy and policy than the other BRIC countries. Why is India outperforming so much? Is it because the markets are expecting a major shift in policies to finally endorse foreign direct investment and other important pro-growth supply side policies? Or is it something more basic perhaps? Or the big drop in oil prices? Related to this, have we all simply gotten far too gloomy about India? The decline in oil prices was an important factor in enabling some countries to recover from the 2008 shock in 2009. And, it certainly could be again in 2012. As I mentioned in a recent Viewpoint, OECD financial conditions adjusted for oil prices have eased considerably in recent weeks, and for much of my career, such an indicator is a powerful leading indicator of the world economy.
China versus India?
On many occasions, I have written and said that the whole debate about China versus India is not only kind of ridiculous, but it is unfair to India. It is not necessarily the case of one versus the other. On the contrary, they should be thought of as two separate stories. It is true that they both share the fact they have more than 1 billion people. But other than that, there are huge differences. China’s economy was around $7.3 trillion by the end of 2011 and India was around $1.7 trillion. As a result, Chinese citizens are on average around 3 times wealthier than their Indian counterparts. In 2011 alone, not only was China’s $1.37 trillion increase in GDP equivalent to creating another Greek economy every 11½ weeks, and close to another Spain, it was the equivalent to ¾ the size of India. So, direct comparisons have often not made any sense.
Yet I am about to do so. Here we are 6 months through 2012, a year in which many people are extremely troubled about the world and its economy, and have concerns about each of China and India also. Yet, while Chinese stocks are close to flat for the year (disappointing many again), Indian equities are up 13 pct.
Two of many aspects about this relative performance intrigue me this week. Is the ongoing relative performance of India a sign that despite all that beautiful crazy country’s challenges, ultimately its democracy will help its long term economic trend to be stronger for longer (to say nothing about its highly favourable demographics)? I don’t know the answer.
And secondly, back to one of the big core debating points of global investment theory, why does China disappoint again? Is it further clear evidence to support those that believe the best, and therefore, the only way to pro-actively invest for the China (and in the widest context, broad emerging equities) story is to invest through the best global companies and most exposed global developed markets? This debate continues to rage and will continue. Clearly, China’s weak performance so far this year will add fuel. As represented by the data in the charts attached, China has now “disappointed” as an investment since 2007. But before any more people send me emails about this, it is also worth reflecting that since 2001, this is still not the case. Chinese equities have disappointed relative to their BRIC peers, but they have still strongly outperformed their developed peers. Measured by MSCI, China is up by 227 pct still, which compares to 73 pct for the Swiss market, for example, often the developed market many investment theoreticians like to use as a more superior way of supposedly getting this exposure. Not too shabby!
Against this background, there are so many interesting stories about China. A recent NY Times article received much publicity for its claim that China is supposedly massaging its data to be less weak than it really is. This is something that I have heard on and off since 1997 and is not new. It is partly why, when I was in charge of GS Economics, we developed our own proprietary GDP indicator which lives on today. I don’t believe that China deliberately massages its data. It is the case that one has to question the accuracy of their data, as is the case anywhere. (Have you studied the accuracy of UK data recently?) For a country like China that is changing so quickly and so dramatically, it is hardly surprising that official data series can lose their accuracy.
At the opposite extreme, a recent “Beige book” type survey suggested the exact opposite. In fact, it stated that in Q2, the Chinese economy was stronger than Q1, with retailers in particular citing evidence of improved business. Four out of every five said sales were stronger.
As it happens, next week is a rather big week for Chinese data. In addition to all the usual monthly data, Q2 GDP will be released, for which the expectation is circling around 7.9 pct year-on-year. As always, I shall be looking to compare the relative strength of retail sales and industrial production to see which is stronger, and whether China continues to adjust or not.
One other thing to mention about India in the context of the above discussion. It is noteworthy that both Coca Cola and IKEA have announced significant investment plans for India in the past couple of weeks.
That Disappointing Data.
It is rather irritating to those that try to see a brighter life out there, but there is no doubt about it, the evidence from many economies has gotten worse again this past week, especially in the US. Friday’s payrolls, especially after yet another false signal from the ADP report, disappointed notably. And, coming after a much weaker-than-expected manufacturing ISM report earlier in the week, the US appears to be stuck back in a very low growth mode. Those that like to make comparisons with post-bubble Japan will be feeling rather self-congratulatory and one looks – yet again – to the Fed to see whether their monetary toolbox can do much to change matters. Given the steepness of the drop in the new orders index of the ISM survey, we may have to take another look at our own GDP forecast for 2012, even though we lowered it already to “consensus” a month or so back.
The news from elsewhere around the world was not much better either, although the real story of the week is perhaps the idea that the US is the best in an unhealthy (developed country) global neighbourhood, doesn’t quite ring so true anymore, at least for now.
Back to Markets and the Mood.
I finish this week where I started. If you look at the attached chart of the S&P, it is neatly, albeit irritatingly poised between a number of trend lines and moving averages. Its bounce from the worst of the post-Spring selloff has the market above its, 21-, 50- and 200-day moving averages. But it is below the trend line connecting the declining line of peaks since the Spring highs, and below the sharply rising trend line from last year’s lows. It would take moves above 1380 and 1400 for that to be reversed and all the trend followers to start getting more excited.
I guess the question is: can the US market continue to blame Europe for its performance?
And on that note, I shall leave you to your weekends in peace, merely to note I have managed to write a Viewpoint with no reference to the Euro Area saga – what a treat. (And as for the UK story…goodness me). Good luck.