Category Archives: China


If You’re Thinking About Global Diversification, You Should Read This

  • The developed world is depending, and will continue to depend, more and more on the developing world.
  • The focus of productivity and GDP growth is in Asia.
  • The U.S. is the only country with trade deficits since 1976.


Nobody knows where the market will go in the next week, month, or year, but what can give investors an edge is to look at macro trends that are bound to influence economies and returns on investments.

In this article we are going to analyze productivity and trade balances among the most important global economic powers, and try to derive a long term trend from it in order to improve the international exposure in our portfolios.


Productivity is essential for economic development in the long term, and in the short term is only beaten by credit. But as credit has its cycles in the long term, productivity is what determines if a country is a success or not because credit can only be used up to a point. Productivity is the mechanism through which societies progress.

The issue with productivity is that it is stuck globally. This is because productivity is falling in the U.S. and Japan, slowing down in China, and countries like India still don’t manage to compensate for the declines of these superpowers. However, the trend is clear.

figure 1 productivity
Figure 1: Labor productivity growth rates. Source: Conference Board.

The trend shows how the largest global productivity and GDP growth comes from Asia with some bright spots in Africa. As Africa is still undiscovered as an investment opportunity and complicated to invest in, it is good to focus on Asia for international long term diversification.

Higher productivity means that people are achieving more with their own means, education and capital, which improves economics and living standards. This further improves education and healthcare which creates an upward spiral. As Asian countries have a low baseline, there is plenty of room and time for them to develop and grow.

Jim Rogers, co-founder of the famous Quantum Fund with George Soros, is heavily invested in Vietnam. Of course, such an investment is difficult to make as it has many capital constraints at the moment, but it shows you where smart money is going.

A country that is easier to invest in is India, which had a GDP growth rate of 7.3% and productivity growth of 5.2% in 2015. The fact that productivity growth in the U.S. was 0.7% in 2015 and GDP growth was at 2.4% means that GDP growth isn’t exclusively influenced by long term, healthy productivity increases, as is the case in India, but is also greatly influenced by debt. We all know that debt works in cycles, so sooner or later we will see some deleveraging take place that will send the U.S. into a recession, hopefully later than sooner so that we can still enjoy this bull market for a while longer. The situation is the same in Europe; productivity grew at 0.9% while GDP grew at 2.0% in 2015.

Balance of Trade

Among other factors like productivity and credit cycles, the balance of trade (BOT) is a very important factor for assessing the health of an economy. The BOT is often shunned by economist as one country has had a BOT deficit for 41 years and things seem to still go pretty well there. We are of course talking about the U.S. which saw its last trade surplus in 1976.

figure 2 U.s. balance of trade
Figure 2: U.S. BOT. Source: Trading Economics.

This means one thing: the U.S. is spending more than it is producing which is not news, but is good to have in mind when deciding where to go with your global investments.

Other countries—like the U.K., Canada and Brazil—also have BOT deficits, but they have evened out in the long term with past surpluses, with things being a little bit worse for the U.K.

figure 3 canada
Figure 3: Canada BOT. Source: Trading Economics.

Europe, China and Japan have a surplus in their trade balances.

figure 4 EU balance of trade
Figure 4: Europe BOT. Source: Trading Economics.

BOTs show only one side of the equation where usually net investments cover for the trade deficit. But the current account for the U.S. is also negative.

figure 5 current account
Figure 5: U.S. current account. Source: Trading Economics.


The world will be a very different place in 20 years as global trade, productivity and economic growth shifts from the western world toward Asia. With countries like India and Indonesia reminding us of what China was 20 years ago, we should not be surprised if such a scenario replicates itself in those and other emerging countries.

This doesn’t mean that we should be completely invested in emerging markets, but if we have to choose between a company that has sales only in the U.S. and a company that is selling globally for the same valuation, we ought to go for the global one as global macroeconomic long term trends are clear and unavoidable.

The good news is that emerging markets growth is what will push the currently stuck developed economies forward as increases in global demand will be good for everyone.



Emerging Markets Are Hot – Here Is Where You Should Put Your Money

  • Emerging markets are up 10% since our last article on the subject, but the FED’s rate action might quickly erase the gains.
  • Valuations are starting to diverge, but don’t fight the trend.
  • Keep an eye on China as it is relatively undervalued and still boosts economic growth of 6.7%.


In May we discussed how emerging markets have been rediscovered but are still undervalued. Since then, the emerging markets ETF is up 10%.

figure 1 emerging markets
Figure 1: iShares MSCI Emerging Markets ETF (EEM) since May. Source: iShares.

As emerging markets include a lot of countries and segments, in this article we are going to see which segments in emerging markets are the best investments and which hold the highest risks.

What Has Been Going On?

The central reason emerging markets have outperformed is because investors regained confidence in them and plowed more capital into them, unlike in 2015 when the story was the opposite. The fact that developed countries continue with their monetary easing increases risk appetite and forces investors to search for better returns in riskier assets such as emerging markets. This partly explains why emerging markets asset prices have been pushed higher.

Not only do stocks enjoy the benefit of global monetary easing, but so do bonds. As emerging markets have higher yields, desperate investors pursue those yields no matter the risks. But this is a common trap in which many investors have been caught in the past. Think of Argentina. This is a typical textbook situation, when yields are high and increasing, people pull their money out of emerging markets in fear that things might get worse. But when yields are falling, and it is unlikely that things will get better, people plow money into emerging markets. The emerging markets premium in comparison to U.S. junk bonds is minimal, but let’s not forget that by holding emerging market debt you are often exposed to currency risks.

figure 2 bond yields
Figure 2: Difference between yields on emerging markets and U.S. junk bonds. Source: Bloomberg.

Such a low premium suggest that investors should carefully assess the risks before investing in emerging markets at these low yields. But what is pushing emerging markets up is the opposite of what pushed them down in 2015, capital inflows and outflows. Since the beginning of 2016, capital inflows have been increasing.

figure 3 flows
Figure 3: Total non-resident capital inflows to emerging markets. Source: Institute of International Finance.

With increased capital inflows, asset prices are bound to go up, but not all emerging markets are enjoying the same investor confidence. China is a good example. Global funds toward China are negative as investors fear the further depreciation of the yuan and slower economic growth.

Fundamental Perspective

From a valuation perspective, emerging markets are still undervalued despite the recent upside. The iShares MSCI Emerging Markets ETF (EEM) has a PE ratio of 11.56 and a price-to-book value of 1.56 which is still far from the iShares S&P 500 ETF (IVV) PE ratio of 20.7 and price-to-book value of 2.88. Chinese stocks are the cheapest with a PE ratio of just 8.24 and a price-to-book value of 1.41 for the iShares MSCI China ETF (MCHI).

figure 4 emerging markets funds
Figure 3: Emerging markets funds. Source: Wall Street Journal.

As our primary investment thesis back in May was that emerging markets are undervalued, the current price increase and investor unwillingness to invest in China make it the probable future winner. To know more about recent developments in China read our recent article on it here.

As global emerging markets are in an uptrend and far from fair valuations, it might be premature to completely jump exclusively into China and ignore other emerging markets. However, as valuations in other emerging markets continue to increase, creating an even larger divergence from China, it might make sense to “overweight” your portfolio toward China, since in the long term earnings are all that matter.

As a point of reference, the Brazil ETF (EWZ) PE ratio is 13.29 while the Indian ETF (INDA) PE ratio is higher at 21.15. Compared to a PE ratio of 8.24 for China.  More daring investors might want to look at Russia where the situation has stabilized but still has low valuations with a PE ratio of 7.36 and a price-to-book ratio of 0.76 for the iShares Russian ETF (ERUS). We’ll discuss more about Russia in a future Investiv Daily article.

For specific investments, the “detailed holdings and analytics” document on the iShares ETFs’ page is a great resource.


When investing in emerging markets, don’t forget about risk. Drops are sudden and sharp, especially around high valuations and low yields. For example, the iShares China ETF (MCHI) is still 28.5% below its 2015 high.

figure 5 china ETF
Figure 4: China ETF. Source: iShares.

The moral of the story is to always look at valuations and don’t get euphoric about emerging markets. Boom and bust cycles are much more frequent than with developed markets due to lower market capitalizations that are strongly influenced by global capital flows which are fickle. We have witnessed two sharp emerging markets declines in the last 12 months—one in August 2015 and the second in January—both of which are a good reminder to not forget that volatility is on the daily menu and another downturn might be just around the corner.

The Fed poses an additional risk to emerging markets if it decides to increase rates due to the tightening U.S. labor market in order to stay ahead of the curve. Higher interest rates in the U.S. would quickly shift capital flows to the less risky U.S. from the riskier emerging markets.


Emerging market are and will stay difficult to navigate. Their volatility is based on low market capitalizations that can easily be influenced with relatively low capital flows when compared to developed markets. Therefore, a good idea is to watch them carefully and not fight the trend because emerging markets tend to move fast in various directions. In January 2016, it seemed like the end of emerging markets was near and now, just 8 months later, it seems all roses.

For investors not exposed to emerging markets, the best thing to do is to look at specific assets that have consistent cash flows and provide diversification. Diversification can also be found in individual companies that have revenues both in the developed world and emerging markets.

Chinese companies have relatively low PE ratios as investors are still not confident about the Chinese economy. Beware that we are not talking here about a recession, but only about growth worries related to China managing to continue growing at more than 6.7% a year.

Stay tuned to Investiv Daily for market updates and specific investment reports on emerging market stocks.


Where The Risks Are: It’s Not Where You Might Think…

  • Car sales are in a downtrend and PMI is falling, which ties the FED’s hands.
  • Japan has just entered into direct economic stimulus with $273 billion.
  • The Bank of England behaves like the economy is in a depression, cutting rates and printing money.


Yesterday we discussed how China isn’t as big of a risk as many would like to make it out to be. Today, we are going to go through the latest data from the U.S., Japan and Europe in order to assess their riskiness.

The U.S. 

We already discussed on Tuesday how the GDP has grown at a slower rate than expected and the actual growth is fueled by increased consumer debt, which isn’t a sustainable long term situation. Going into more detail will enable us to better forecast what will happen in the short to midterm.

One area of consumer spending that is currently essential for U.S. GDP is car sales. In the first 7 months of 2016 car sales have hit a plateau, which means there is more downside than upside. Car sales peaked in October 2015 and it looks like a downtrend is forming. The peak reached in sales is especially worrisome as car loan rates have hit historical lows and are currently around an average of 4%.

figure 1 car sales and rate
Figure 1: U.S. Total vehicle sales and car loan interest rates. Source: FRED.

This explains why the FED’s hands are tied when it comes to interest rate increases. Increased rates would increase the costs for consumer debt and therefore immediately lower consumption, sending the U.S. into a recession.

If you are overweight car stocks, be careful and watch what is going on because the low valuations are there for a reason and any kind of economic turmoil might be very negative on stock prices.

Continuing on the state of the U.S. economy, the Institute for Supply Management’s (ISM) Purchasing Managers Index (PMI), which measures factory activity, came in positive but below expectations on Wednesday. The PMI declined from 53.2 in June to 52.6. Any reading above 50 signals activity is expanding which is a good sign, but a downward trend isn’t ideal to see as most indicators were slower than in the previous month.

figure 2 manufacturing
Figure 2: U.S. manufacturing. Source: ISM.

Apart from the decline in activity, it is also important to note how the PMI reacted to the FED increasing interest rates in December 2015. The expectation of an interest rate increase alone decreased the PMI, and only with the later change in the FED’s rhetoric did the PMI return back into positive territory.

figure 3 the fed and PMI
Figure 3: PMI index in the last 12 months. Source: ISM.

This is yet another indication of how difficult it will be for the FED to increase rates as businesses and people have gotten used to low rates and any increase would immediately lower economic activity, pushing the FED to step backwards.

Japan’s Easing

On Tuesday Japan’s prime minister, Shinzo Abe, approved a $274 billion stimulus package aimed to help the Japanese economy and to help ensure his political survival. The package includes $173 billion of fiscal measures, $73 billion of government spending and $59 billion in low cost loans.

As this is a step beyond monetary easing, we will see what the impact will be on the Japanese economy. Analysts expect added economic growth of 0.4%.

The conclusion is that, if everybody is easing, it doesn’t make much of a difference and forces other central banks to do the same. This is the third reason in this article that makes it difficult for the FED to increase rates.


The situation isn’t better in the UK.

While the major economic impact of BREXIT won’t be seen for two to four years, the first signs of a slowdown can be seen from the weaker sentiment. The UK Manufacturing PMI came in at its lowest level since 2013, which was a recession year in Europe. What is also important is the sharp decline, the PMI index fell to 48.2 in July from 52.4 in June which confirms BREXIT related uncertainty.

figure 4 uk pmi index
Figure 4: UK manufacturing PMI index. Source: Markit Economics.

On top of the negative PMI, the Bank of England has slashed its growth forecast to 0.8% from 2.3% for 2017, lowered interest rates to a record low, and announced increased lending of 100 billion pounds to banks. It will also increase bond purchases by 60 billion pounds. The Bank’s actions portend an outright depression in the UK rather than a possible future economic slowdown, but this is what central banks do these days.


A positive note comes from Europe which saw its PMI grow in July to 53.2.

figure 5 gdp pmi europe
Figure 5: Europe PMI. Source: Business Insider.

But the negative news is that GDP growth in Europe is expected to only be 0.3% in Q3 2016, further emphasizing the already bad decline to the 1.2% annualized growth rate in Q2 2016. All eyes are on the ECB which has stated many times that it will do whatever it takes to keep things stable and growing, thus, more stimulus.


The main question is: how long will central banks be able to keep things stable and markets high, and when will monetary and fiscal stimulus become inefficient and spur inflation? All factors indicate that the markets are overvalued, the economies are stretched and monetary stimulus is reaching its limits. As soon as signs of a normal economic cyclical downturn emerge, central banks step on the gas and print more money.

On one hand, investing logic would indicate that investors stay in cash as a bear market is imminent, but the fact that central banks keep printing money and saving markets, or not even allowing markets to decline, indicates that stocks and bonds will be artificially propelled even higher and investors might want to stay long these markets for the time being rather than fight the trend.  However, having well thought out stop loss orders in place is a must, and raising some cash would be prudent too because at some point things will turn.

It is important to keep an eye on inflation because low or no inflation is what is enabling central banks to continue with easing. As soon as inflation increases, central banks will have to start tightening.  Consumer price inflation is still at only 1%.

figure 6 inflation rate
Figure 6: U.S. inflation annual inflation rate per month. Source: Trading Economics.

As we discussed yesterday, China is growing at 6.7% per year, has low debt when compared to developed countries yet and is considered a risk. While developed countries use desperate measures to keep things as they are, fight deflation and spur some economic growth. Logic suggests that the risks lie in the developed world and China is a much safer bet.



Forget The News: If You’re Not Exposed to China, You Should Be. Find Out Why.

  • Don’t be scared by the news, China is growing strong and has incredible future prospects.
  • Temporary bumps are and will continue to be normal.
  • Portfolio diversification with China is essential for increased returns in the future.


Exactly a year ago fears around slower economic growth in China, the Yuan devaluation, and oil prices below $40 were the main catalyst for a market correction. The S&P 500 fell from 2102 points on August 17, 2015 to 1867 points on August 25, 2015.

In today’s article we are going to analyze the current situation to see if things are better, or if the market has shifted its focus to other things.

Yuan, Economic Growth and Oil

When the Chinese government devalued the Yuan it spread fears around the globe that the Chinese economy might be doing worse than previously assumed. Everyone knew China was slowing down, but expected growth was still at 7%.

The Chinese government devalued its currency by 3.2% on August 15, 2015. Since then the Yuan has further depreciated by 3.5% against the dollar, but no one seems to care about that anymore.

figure 1 usd yuan
Figure 1: Yuan per 1 $US. Source: XE, author’s own annotations.

The fear then was that Chinese economic growth was going to slow down more than expected. And while growth has been slightly less than 7% over the last year, it is still growing at 6.7%.

figure 2 chinese growth
Figure 2: Chinese annual economic growth. Source: Trading Economics.

In order to avoid a hard landing, the Chinese government has taken action. It has forced state-owned companies to increase investments, and it further lowered interest rates to a record low of 4.35% which further increased debt, forcing the debt to GDP ratio to record highs. In its annual review of the Chinese economy, the IMF (International Monetary Fund) stated that policy actions improved the Chinese near term growth outlook but “the medium-term outlook, however, is more uncertain due to rapidly rising credit, structural excess capacity, and the increasingly large, opaque, and interconnected financial sector.”

Increasing debt to GDP means that China is using debt to keep its growth stable which isn’t unusual, but does tell us that without increased debt levels the economy would have slowed down sharply. Current Chinese debt to GDP is 43.9% which is still very little when compared to the U.S. with 104.17%, especially when we know that China is growing at a 6.7% rate and the U.S. at a rate of 1.1%.

figure 3 debt to gdp
Figure 3: Chinese debt to GDP. Source: Trading Economics.

Even the IMF, in its closing remarks, states that Chinese debt is not worrying, especially as China is transitioning from a manufacturing economy to a service based economy which is never a smooth transition.

The final scare last August was that oil prices fell below $40. At the moment oil prices are again around $40, but the S&P 500 is still stable at above 2150 points as this is considered the “new normal.”

figure 4 oil price
Figure 4: Oil prices. Source: Bloomberg.

Local Perspective

In order to better understand what is going on in China, it is a good idea to take a local view which will provide us with a better understanding of the headlines we have read or may read in the future.

Regional data for the first six months of 2016 show that economic growth increased in 15 of the 31 Chinese provinces which indicates that things are, if not turning around, pretty stable in China. On the other hand, difficulties in the coal industry have created a recession in the provinces based on coal and steel production.

figure 5 province growth
Figure 5: Chinese economic growth by province in 1H 2016. Source: Bloomberg.

The chart above is essential for understanding that China is transitioning and therefore economic problems have to be expected, but at the same time, China is still booming. Don’t let negative news about a specific sector or province in China scare you about its future prospects. A longer term perspective will give us a better view of where China is now and where it is headed.

Longer Term Perspective

The GDP per capita indicator is the best way to see where a country is and where it is going. The current GDP per capita in China is $6,416 which is just 12% of the U.S. level ($51,486).

figure 6 gdp per capita
Figure 6: Chinese GDP per capita. Source: Trading Economics.

The low starting level is reassuring for the future as there is still plenty of room to grow. Fears about China should be cast aside when looking at the longer term perspective, and not be reacted to like they were last August as the IMF still predicts that China will grow around 6% for the foreseeable future.

figure 7 gdp forecast
Figure 7: IMF Chinese growth prediction. Source: Knoema.


All in all, we can say that China is doing well and that last year’s August scare was just that, a scare, and a market misperception. China is a large country that still has plenty of room to grow. It is completely normal for it to be a bumpy ride, and seeing what China has done in the past 25 years gives confidence that the country will continue on its growth path, and scary moments can be used to buy investments on the cheap.

Given the positive long term prospects, it might be a good idea, if you haven’t already, to have your portfolio exposed to China. This can be done by buying Chinese ETFs or being overweight in companies that have a large exposure to China. The iShares China Large Cap ETF’s (NYSE: FXI) historical performance shows how investment performance is related to economic growth.

figure 8 etf - new
Figure 8: $10,000 invested in the China large cap ETF in October 2004. Source: iShares.

Therefore, with much weaker prospects in the U.S., don’t let frightening headlines scare you. Diversify into China, there is still plenty of room to grow.


Is Global Recession On Its Way? Brexit May Be A Warning Sign…

  • Global GDP growth rates are stalling even with increased monetary stimulus.
  • There are several potential recession triggers.
  • It is important to assess the risks a portfolio runs as no one can know when a recession will come, but eventually it will as it always has.


The main FED goals are sustainable economic growth and full employment. In order to achieve those goals, the FED has decided not to increase interest rates as the economy is still relatively weak and employment has been slowing down. Not only that, but the expectation of future interest rate increases has been revised downwards.

This brings several consequences. In case of an economic downturn, which would be completely normal as we have not had one in the last 7 years, the FED has no maneuvering space left to help the economy as the interest rates are still at recession levels.

1 figure gdp to date
Figure 1: U.S. GDP growth to date. Source: Multpl.

As the last recession was 7 years ago and every economy is cyclical, we should not be surprised if a recession comes along. No one can know when this will happen as recessions always come unannounced, but we can take a look at the risks that can trigger a recession and the consequences of it.

Potential Recession Triggers


A vote in favor of the U.K. to leave the EU might influence some longer term market disruptions as London is the European financial center. The U.S. Treasury Secretary recently issued a warning stating that the global economy would be damaged if the U.K. leaves. The recent polls show a scary shift toward a leave.

2 figure brexit
Figure 2: Brexit polls. Source: Financial Times.

The ‘remain’ has always been greater than the ‘leave,’ but it seems that the undecided are turning toward a leave. Next week will be an interesting one as we will see the long awaited Brexit vote confirmed, be it a leave or a remain.

Another Bad Summer in China

Last summer we had the first meaningful stock market fall in the last 7 years as the Chinese stock market precipitated on weaker Chinese growth.

3 figure China GDP growth
Figure 3: Chinese GDP growth per quarter. Source: Trading Economics.

As China is increasing its debt levels in order to force economic growth, the long term perspective is one where if all goes well, China will have stable growth levels but any global shock like the above Brexit might influence further slowing down and a global deflation spiral.

4 figure china debt to gdp
Figure 4: Chinese debt to GDP. Source: Trading Economics.

Debt usually means trying to hold on to the status quo until there is liquidity. The above increases in Chinese GDP show that China is desperate to keep its growth rates as it might implode without high growth rates.

As China and all other economies are dependent on global trading, any indication of global isolation would quickly spur discomfort into the market and this brings us to the next possible trigger.

U.S. Isolationist Tones

Currently Clinton is ahead in the polls but the Brexit example shows how we cannot bet on polls. If Trump’s isolationist rhetoric is more than just election tactics this could have a severe impact on U.S. trade and global economics. History has proved that any kind of isolation is detrimental to economic growth and wellbeing, and the current high standard we are enjoying is a result of global integration increasing its speed in the last three decades.

Global Monetary Policies Imbalances

With the FED slowing down, this is less of a concern as the higher U.S. interest rates would have strengthened the dollar and lowered U.S. exports. Everything produced in the U.S. would have been more expensive and U.S. corporate earnings would have been lower in dollar amounts.

Countries like India or Brazil, where interest rates are relatively high, are still not such a big influence on the global economy, but an economic rebound or inflationary pressure in one of the global economic pillars like Europe or the U.S. would trigger worldwide financial instability.

5 figure global interest rates
Figure 5: Global interest rates are at historical minimums. Source: Trading Economics.

The event of such a situation is highly unlikely especially after the FED has slowed down with its interest rate plans and the situation in Europe is not indicating economic exuberance.


Europe is the next risk factor for global markets. Even if we haven’t had a ‘Greek’ moment or a bank crisis for a while as the European economy is growing, that growth is still not stellar and has already peaked.

6 figure EU growth
Figure 6: European GDP growth. Source: Trading Economics.

EU growth has reached 2% in 2015 but is already declining and sits at 1.8% currently. This is a good number for Europe as the 2012/2013 recession is not far away, but the growth is fueled by increased debt levels and the non-performing debt ratios are scary for EU banks.

6 figure non performing loans
Figure 7: Non-performing debt ratios for EU banks. Source: European Central Bank.

For comparison, the average U.S. non-performing loans are at 1.67% which is much lower than the EU 7%.

7 figure us non performing loans
Figure 8: U.S. non-performing loans. Source: Statista.

Therefore, Europe not only has the ‘Brexit’ issue as a potential destabilizer but also bank fragility and the fragility of the whole economy.

Understanding of Risk

The last risk related to global markets is the assessment of risk investors have. With yields at historical lows, investors might be losing the perception of risk, especially as central banks run to save the markets as soon as any decline is anticipated.

A shift in the perception of risk might be the biggest risk of all as we have seen that after the FED decided to keep rates steady and lower for a longer period of time, the DOW index declined and did not, as usual, increase based on continued FED stimulus.


The scope of this article is not to be the chicken little but to objectively assess real risks to your portfolio. A recession would be catastrophic at this moment as central banks are out of firepower. Maybe they can keep markets at a permanent high level with low interest rates, but there are several structural and cyclical longer term forces that come into play here and cannot be influenced by monetary policy.

The U.S. is approaching full employment, corporate earnings and investments have been declining for a while even though interest rates are still low. As we already mentioned, we cannot know when any of the above described risks will kick in, maybe even next week with Brexit, or not in the next few years.

Eventually a recession will come, as it always does, unannounced and surprising, nobody knows when but it is good to think of how risky is your portfolio in relation to that and if maybe the same returns can be reached with less risk.



Headline Rollercoaster: The Economic Limbo Continues

  • Europe and Japan continue with their easing policies as not much changes.
  • Chinese Purchasing Managers’ Index is positive but not far from stagnation.
  • US data flirts between a dead cat bounce and a stronger economic recovery.
  • Finding specific good investments should be the best answer to uncertain economic times ahead.


Last week was an interesting one as it was filled with various economic news. It is important to summarize that news to see if it will move the needle as the market has moved only sideways since December 2014.

Global News

Mario Draghi, the president of the European Central Bank, announced on Thursday that the ECB will keep rates unchanged as it expects only moderated but stable economic growth, and there are still several sectors that need time to recover as turmoil in emerging markets and in some European countries disables stronger growth. As for EU inflation, expectations are that it should stay stable in 2016 and pick up in 2017 and 2018, but this is a story that we hear over and over again with just the timing being delayed. Inflation in the EU would be globally beneficial as it would push for higher interest rates in Europe and keep the balance between the currently rising dollar and weak Euro. Eventually it will rise but who knows when, and in the meantime US exports are already expensive and will be even more so if the FED raises interest rates.

Shinzo Abe, Japan’s prime minister delayed the announced rise in consumption tax from 2017 to 2019, despite repeatedly saying that only a shock of the scale of a Lehman Brothers collapse or an earthquake could delay the implementation of the increased tax. Such a move indicates that the Japanese economy is not strong enough to withstand any kind of tapering. So the story in Japan is practically the same as in Europe with continuing easing amid weak economic circumstances.

After some positive news from China at the beginning of the year and a hoped faster growth, the latest data from the Chinese Purchasing Managers’ Index (PMI) at 50.1 still indicates growth but a subdued one.

figure 1 china pmi index
Figure 1: Chinese Purchasing Managers’ Index. Source: Statista.

The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. An index value above 50 indicates a positive development in the industrial sector, whereas a value below 50 indicates a negative situation. The 50.1 mark is just above neutral and not the kind of news that could move global markets into bullish territory.

The Australian GDP gave a positive note to the week as the annual growth stepped up to 3.1% from an expected 2.9% mostly based on a larger than expected pickup in commodity prices.

News From The US

Unfortunately, news from the US starts on a darker tone as employers added only 38,000 jobs in May, which is the weakest performance since September 2010. As the rule of thumb is that an increase of 150,000 jobs indicates economic growth while any number below that indicates a weak job market and rough times for the economy, the news might make the FED delay interest rate increases, especially now that Europe and Japan are continuing with their easing policies.

The unemployment rate fell to 4.7% from 5% but mostly due to a decline in labor force participation as half a million Americans dropped out of the workforce. On the positive side, consumer spending advanced by 1% in April which is the fastest pace in the last 7 years. On a yearly basis, the inflation index climbed 1.1%. The US Purchasing Managers’ Index came in on an upbeat tone at 51.3, which indicates expanding activity, especially as it was at 50.8 in March 2016.

figure 2 pmi us
Figure 2: US Purchasing Managers’ Index. Source: Trading Economics.

The final interesting piece of news is the Nation’s international trade deficit that increased from $35.5 billion in March to $37.4 billion in April. Both exports and imports increased but imports increased at a faster pace.


The situation in the US is difficult to analyze as it paints a contradictory picture. Spending is increasing which is good for the economy, but it doesn’t spill into additional hiring which is the main factor for creating sustainable growth. The increase in spending can easily be attributed to a purchasing rush before inflation, and the expected increased interest rates kick in.

The global perspective isn’t better as Europe and Japan find it difficult to reach their targets and China is slowing down. It isn’t surprising that the market didn’t go anywhere in the last year and a half with such news.

As governments cannot reach set targets by using all the monetary policy mechanisms at their disposal, investors should be aware of investing in the market and opt for strategies that are not sensitive to economic activity. Also in the current ETF era, stock picking might come in handy as it enables one to find the best companies that can survive financial shocks or outperform in a longer term ‘economic limbo’.



A Positive Note From Housing

  • Housing starts, positive homebuilders and a pickup in Chinese building all create a good feeling about the economy and markets.
  • Average house prices have increased but median prices show that the current situation is not even close to a bubble.
  • Rent prices are rising and therefore more buying is expected as people switch to buying instead of renting.


Recent news about housing is positive. On Monday, the National Association of Home Builders reported the housing market index at 58 where a reading above 50 means that home builders have a positive feeling about the single-family housing market. Two days earlier, on Saturday, the Chinese National Bureau of Statistics reported that property investments in the first four months of 2016 rose 7.2% and construction starts gained 21.4%. And on Tuesday new housing starts came in at 1.17 million or 6.6% higher than in March. All of this is very positive news but the most important thing for investors is how this affects the economy and markets. As housing ignited the great recession, it is important to constantly be aware of what is going on in the housing market.

Housing, the Economy and Markets

Housing is an essential sector in an economy but it’s also one that has been the source of crises. The environment for house buying is cyclical as it is related to interest rates and employment. The result is that house prices also have boom and bust cycles. Economists and policy planners have to be aware of the cycles and try to keep things stable as stability is preferred. As there is not yet a clear policy toolkit on how to manage housing booms or on how to evaluate if the housing market is overvalued, investors might still get the short end in an eventual housing crisis.

In relation to the economy, a stable housing market is what enables mortgages and labor mobility. Labor mobility is essential for the reach of full employment and mortgages are essential for a healthy monetary policy. International monetary fund (IMF) research shows that more than two thirds of the systemic banking crises in recent decades were influenced by housing.

Current Housing Situation

The current housing situation is still below the highs experienced in 2007 but showing good signs for a strong recovery.

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Figure 1: S&P/Case-Shiller U.S. National Home Price Index from 2006. Source: S&P Indices.

The low of the home price index was reached in 2012 at 134 points, or 28% lower than the peak reached in 2006 at 184.62 points. The current value is 175.61 and up 5.2% year-over-year. An indication of the overvaluation of a housing market can be extrapolated by looking at rent to price ratios. House prices and rent should move in tandem, if one gets high people tend to switch between renting and housing.

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Figure 2: Gross rent price ratio 1960-2015 Q3. Source: Lincoln Institute.

The last available rent to price ratio (Q3 2015) was exactly 4% which is still good when compared to the 3.13% reached in Q3 2006, but the declining trend creates some concerns as house prices do not move along with rents. It is especially strange that rent prices do not go up as fast as home prices as the ownership rate has declined and keeps falling.

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Figure 3: US homeownership rate. Source: United States Census Bureau.

The above might create some concerns, but don’t be fooled by statistics. The above gross rent price ratio uses average prices (figure 2), but by using median prices (median shows the middle point of a number set) the results differ.

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Figure 4: Median asking rent for vacant rent units 1995-2016. Source: United States Census Bureau.

Median asking rent has constantly increased, especially in the last 5 years while median asking house prices have rebounded a bit, but not much since the 2012 lows.

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Figure 5: Median asking sales price 1995-2016. Source: United States Census Bureau.

The difference between average and median rent and home prices shows that there is a segmentation in the US housing market where some properties skew the market index and make it look overvalued in relation to rent. From a median perspective it looks like the housing market still has plenty of room to grow as rents are soaring and not house prices. This might be the result of the great recession and tighter mortgage regulations, but with strong employment the outlook is positive and is confirmed by recent housing data that shows a 6.6% April increase in residential starts (1.17 million seasonally adjusted). Also, from an historical perspective there is still a huge gap to be filled with new homes as residential starts are still far from the historical average of 1.5 million.

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Figure 6: New privately owned housing units started. Source: FRED.

Housing in China

As China is the world’s second largest economy, it is also important to see what is going on there. China is a developing country and therefore its housing sector has a strong influence on commodity prices around the world. The good news is that property prices are increasing as a result of the government monetary policy.

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Figure 7: Chinese housing. Source: Wall Street Journal.

This might keep the Chinese economy growing at expected levels and keep the global markets stable.


It is interesting how similar statistical data can tell a completely different story. As Benjamin Disraeli used to say: “Lies, damned lies and statistics.”

Median rent prices are still surging and therefore house prices should not be considered in a bubble just because the average house prices increased in the last 4 years. Median house prices show that there is plenty of room to grow and that the recent growth is a sustainable one, especially with high employment. The situation in the Chinese housing market is also improving and therefore the outlook for the economy and financial markets should be positive from a housing perspective.



Facts, Fears and Opportunities in China

  • Even if China is slowing down, the growth is still excellent and the potential is huge.
  • The Chinese market is 43% down from its 2015 high.
  • Short term fears might give trading opportunities as the long term trend is a growing one.


In the last twelve months there has been a lot of talk around China with various economic forecasts and explanations which resulted in a severe negative influence on markets ranging from stocks to commodities. This article is going to give an overview of what happened in the last year, and some scenarios of what might happen and how that should influence financial markets.


In August 2015, China’s central bank (PBOC) made a move to devaluate the Yuan in relation to the dollar. The move was influenced by the government’s worry about slowing growth and to make the currency more market driven. The move created various market shockwaves and shows what kind of power and effect China has in today’s world. By the end of August, the S&P 500 fell by 12% and commodities further declined to five year lows based on fears of slowing Chinese demand. The devaluation of the currency was made in combination with quantitative easing where the aim was to stop the steep fall of the Chinese stock market. The Shanghai stock index started its steep decline in June 2015.

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Figure 1: Shanghai Stock Exchange Composite Index. Source: Bloomberg.

From a multi-year perspective, it is clear that the market was in a huge bubble because it grew from 2,000 points in 2014 to 5,166.3 points in June 2015. The current level of the Chinese market is down 43% from its peak, but it is still up 50% from the 2014 levels. The PBOC intervened in order to lower the possible repercussions of a market meltdown. All of the above was mostly influenced by the slower growth of the Chinese economy.

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Figure 2: Chinese GDP growth per quarter. Source: Trading Economics.

The slower growth and a switch from a manufacturing economy to a service economy is what has made the global market tremble. The International Monetary Fund expects the Chinese economy to grow at a rate of 6% in 2016 and 2017, and a switch to a service economy is feared to lower demand for commodities. An even slower growth than expected could have repercussions similar to the ones the financial and commodity markets experienced in 2015. The last info about Chinese growth is a 6.8% increase for Q1 2016 which was considered positive news and further fueled the recovery in commodity prices, but the information from the Chinese Bureau of Statistics shows that despite quantitative easing and a stronger real estate market, Chinese manufacturing grew at a slower pace in April in relation to March. The manufacturing index was at 50.1 for April which still indicates expansion but flirts with contraction as it is close to the 50 mark.

With the exception of manufacturing, the question is not if the Chinese economy will continue to grow, but how fast it will continue to grow. As the Chinese GDP per capita increases the country loses some of the competitive advantages it had in comparison to the rest of the world but the increased development enables a different, more service oriented growth. Chinese GDP per capita is currently $7,990 which is only 14% of the US’s and shows how much potential China still has.

But, the service oriented and less construction oriented growth has severe implications. The exports of most emerging countries and Australia are strongly related to Chinese demand and therefore those markets are severely affected by any kind of Chinese slowdown, especially a manufacturing or real estate one.

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Figure 3: Percentage of exports to China. Source: The Economist.

Australia, African countries, Middle East oil producers and South American commodity exporters are all highly dependent on the Chinese economy. As the above mentioned countries and regions are big enough to influence the global markets, every investor should keep an eye on what is going on in China.

Short and Long Term Forecasts

It is important to look at China from an objective perspective and not in comparison to what happened in the last 25 years. Growth rates higher than 10% are much more easy to reach when the starting point is low like it was for China. As the economy grows, the global competition kicks in and levels economic growth. The current situation is one where exports are lower, bad loans are rising, and the industrial sector is at its weakest since 2009. Capital outflows in 2015 were $1 trillion and the PBOC is trying to limit the damage by injecting fresh capital into the market.

At the same time industrial and structural trends are turning against China.

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Figure 4: Chinese industry trends. Source: OECD.

As shown above, industrial output growth has declined from 9% to the current 6%, manufacturing investing has fallen and state-owned enterprise profits are falling. This in combination with the negative demographics where the Chinese working-age population is shrinking due to the one child policy, which does not paint a rosy picture. But the forecasts are all still indicating growth, albeit a slower one. Also the demographic fears should reflect on the Chinese economy only in the very long term; currently 47% of the population is between 25-54 years, thus in prime productivity.

The government targets a growth rate from 6.5% to 7% and has planned the highest budget deficit in the last 25 years which should help the economy. The IMF forecasts Chinese growth at 6.3% in 2016 and 6.0% in 2017, while the OECD forecasts 6.2% in 2016. Not to forget that even if the economy will grow slower it will still grow. A growing Chinese economy can only benefit the global economy and markets. Therefore, the question is not if China will grow or not but how much imbalance it will create in financial markets in relation to it over performing or underperforming expectations. In any case, as a well-diversified portfolio should have some assets in the soon-to-be World’s biggest economy, below are some ideas on how to invest in China.

Chinese Investing Opportunities

One way to be exposed to China is to buy stocks of companies that have a strong exposure in China like Alibaba, Baidu or China Life Insurance that are traded on US markets. The list of Chinese stocks traded on US markets can be found on Nasdaq. A warning here, Chinese accounting and the Chinese securities and exchange policies might vary from US ones and deeper scrutiny is necessary to understand what is really going on in the business represented by the stock. Another opportunity to invest is through ETFs.


Even if China is currently experiencing a slowdown in growth it is almost certain that China will continue to grow in the short term and in the long term. A well-diversified global portfolio cannot miss out on such a growth potential. The Chinese GDP per capita has to grow 7 fold to reach the US GDP and the Chinese seem determined to grow at all costs. If the market has reached its bottom depends mostly on the short term news on Chinese growth and there lies the risk of investing in China, it takes a lot of courage to invest in a market that is more than 40% down in the last year, but such markets also create the best opportunities. For anyone more interested in trading short term, expectation misses in Chinese performance might give good trading opportunities as the underlying long term trend is a growth one.



A Broader Perspective on the Global Economy

  • Easing monetary policies go on globally but do not seem to fuel sustainable growth.
  • China is slowing, Japan is looking toward another recession, and the global outlook is adjusted downwards.
  • Bad news might be around the corner, but good news is as well.


News is usually focused on the latest happenings. The fact that the human brain is set up in a way that it always tries to focus and eliminate marginal information brings to the consequence that most people do not objectively analyze the world around them. An example: How many blue cars have you seen today? Probably none because you were not looking for them, but as soon as you focus on them you will be surprised by how many you will see. The same applies to finance.

Just two and a half months ago the S&P 500 was 12.5% lower than now and headlines were filled with negative scenarios. Oil prices were below $30 and investors looked to avoid any kind of risk by selling stocks and buying bonds. Then, on February 11, FED Chairwoman Yellen hinted to Congress that “the central bank had increased trepidation over the path of interest-rate increases, pointing to accumulating risks to the economy in recent weeks.” The market focused on prolonged low interest rates and not on the accumulating risks in the economy. This article is going to give a broader perspective on the current state of the global economy in relation to financial markets by taking a look at the situation in the strongest economies.

The US

The main economic indicator, albeit one that shows only what has happened, is the Gross Domestic Product (GDP).

Figure 1: US GDP estimates and actual. Source: The Wall Street Journal – Economic Forecast.

The Wall Street Journal has surveyed 60 economists and their estimations are positive and project stable growth of more than 2%. As shown in the figure above, the previous estimates (red line) are usually stable and positive, while actual results (grey columns) are much more volatile and with negative surprises.

There is a rule in finance where if you are wrong with your estimation alongside others the collective wrongness saves you, but if you are wrong and your opinion is far from consensus, your career is at risk. Unfortunately, this usually brings stable, similar estimates close to each other and big actual surprises.

A more scientific way of estimating GDP is done by the Federal Reserve Bank of Atlanta with GDPNow, as it uses only econometrical models based on economic data variables. Figure 2 shows how this metric diverges from the general consensus above.

Figure 2: Atlanta FED GDPNow forecast. Source: Federal Reserve Bank of Atlanta – GDPNow.

The GDPnow model is forecasting only 0.3% growth for Q1 2016. The first advanced estimate from the Bureau of Economic Analysis (BEA) for the first quarter 2016 is due on the 28th of April and will show who is correct, in any case it could be market moving news.


Japan is still finding it tough to reach stable economic growth. “Abenomics,” the monetary easing policy implemented by Japan’s prime minister Shinzo Abe in 2012, is failing to produce the expected results. If Japan experiences another quarter without growth it will be just another recession that has plagued Japan’s economy in the last two decades.

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Figure 3: Japan’s GDP growth. Source: Trading Economics.

A recession in Japan should not make a big influence in international markets as it is generally expected that Japan stagnates, but both the incapacity of creating economic growth—even with a negative 0.1% interest rate—and the aging population strongly resembles the situation in Europe.


The Eurostat will publish preliminary flash estimates of quarterly GDP for the EU area on the 29th of April, synchronizing publications with the BEA (usually 15 days later). This is another piece of information that will be interesting for markets.

Estimates from the European Commission are that the EU area will grow by 1.9% in 2016, but the European Central Bank’s (ECB) decisions do not support such a positive forecast. Last week ECB president, Mario Draghi, left the current low interest rate and market purchases policy unchanged and hinted towards further easing in order to bring the EU economy to the expected levels. Almost two years of interest rates close to zero and the ECB purchasing even corporate bonds did not yet push the EU economy towards the hoped levels, an indication that strong growth for the EU might be difficult to reach. Also, Markit’s Composite Flash Purchasing Managers’ Index is showing signs of slowing growth, falling to 13 month lows in March 2016 for the EU.

Other political issues threaten European growth in 2016. The UK will vote on whether to remain in the EU in June and the pre vote polls do not indicate a clear winner. The UK leaving the EU would have significant economic repercussions and increase the political uncertainty that would strongly influence the Euro and the markets. The immigrant crisis from the Middle East is still a concern and possible increases in border controls might further slow economic trade.

Apart from the negative view, there is always hope that the easing policies will work, the weak Euro promotes exports, the UK might vote to stay in the EU, and immigration might help improve the negative demographics in Europe.

China and Emerging Markets

A fact that was soon forgotten is that the Chinese economic growth in the last few quarters was the slowest in the last 25 years.

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Figure 4: Chinese economic growth from 2010 to 2016. Source: Trading Economics.

China is still growing but many expectations and models that were based on higher growth rates have to be amended. The economic slowdown did induce the huge drop in commodity values in 2015 and that effect will surely reflect itself in local and global economic measures.

China sneezes and emerging markets get a cold. The largest economic downward adjustments are seen in emerging markets, of which Brazil and Russia are the most pronounced. The International Monetary Fund (IMF) expects that the prolonged slump in commodity prices will have a severe impact on emerging markets as they base their economies on exports of primary goods. Africa’s growth is expected to be around 3.7%, thus far from the usual high single digits.


A quick look at what is going on globally does not give much inspiration. The news did not change much since February except that central banks are going to continue with quantitative easing that gave relief to markets. But, the outlook is much bleaker than it was a year ago and the low commodity prices do not contribute to a global increase in economic activity. The IMF predicted in its February outlook that global growth in 2016 would be only 2.5%, which is 35% lower than the average of 3.8% for the last 6 years.

Even if the above data might be a little bit pessimistic, to brighten up the article, China, Africa, the US and Europe are all still growing, albeit at a slower pace so severe economic crises are not expected. But negative news may be just around the corner, so investors should be careful when assessing their risks.