Category Archives: Japan


Are Safe Havens Really That Safe?

  • Economic laws can’t be muted forever, and in the end always get their due, therefore it is good to look at other options to de-risk your portfolio.
  • Gold is too volatile to be considered a safe haven.
  • Diversification should be the best option to avoid losing everything in a market downturn.


Economics is pretty straightforward. The first thing they teach you in ECON 101 is that the economy works in credit cycles. In a positive environment with low risks and low base interest rates, people borrow and spend. They buy a new car, go on trips, refurbish the kitchen and so on, which leads to economic expansion.

But there is only so much you can borrow, with two new cars in the garage of your new house you start feeling a bit tight and as all your main spending needs are satisfied, you start deleveraging. This leads to an inevitable recession.

Even if a recession might sound crazy at this moment in time, don’t forget that we have had 11 of them since 1945 with the average expansion cycle lasting 58.4 months and the average contraction 11.1 months. The current expansion is already 84 months old which statistically should have led to a recession, but the FED hasn’t allowed for a normal, healthy economic cycle to evolve and is trying to manage economic cycles. The more the economic expansion period is artificially stretched, the stronger the negative economic impact of a future recession will be. A good example to look to is the 2007-2009 Great Recession, which was the longest since the Great Depression.

The Japanese example perfectly demonstrates how monetary easing has its limits. Monday’s data showed that the Japanese economy expanded at an annualized rate of 0.2% in Q2 2016 despite government stimulus.

figure 1 Japan
Figure 1: Annualized quarterly change in Japan’s GDP. Source: Wall Street Journal.

As long term investors, we have to follow the main rule of investing which is not to lose money. Therefore, it is of essential importance to always be looking at risks, which I know isn’t as sexy as buying stocks, but it is what gives long-lasting and outperforming returns.

Among the many risks for investors, today we are going to focus on how safe traditional investing safe havens really are.

Investing Safe Havens

The definition of an investing safe haven states that the investment is expected to retain or even increase its value in market turmoil. The typical safe havens most investors consider are gold, U.S. treasuries—especially TIPS or Treasury Inflation-Protected Securities,—the Swiss franc, and defensive stocks. We shall discuss each of these below.


Gold is considered the ultimate safe haven asset, but due to its incredible volatility, I have a feeling that it’s retail investors who get burned by it, making gold a used-to-be the safe haven.

In wartimes, gold is the only worthy currency due to rampant money printing, however, we are hopefully not even close to a war, but are printing money like we are in a wartime. Even though gold is the ultimate hedge against runaway inflation, we may want to rethink it as a safe haven due to its volatility.

In the 1973-1975 recession, gold surged from below $100 per ounce to above $200 but quickly retreated to its previous level as soon as things got better. In 1980, due to geopolitical instability, gold surged to above $800 and again returned to the $350 levels in 1982. Gold notched up a bit in the 1987 bear market and in the 1991 recession, but did not move in the 2001 recession. In 2002, gold started its majestic bull run from prices around $300 to the highs reached in 2011 of above $1,800, only to retreat to $1,100 this winter. It has again surged to current prices of $1,350/oz.

figure 2 gold price
Figure 2: Gold prices since 1973. Source: Gold Price.

I wouldn’t consider an asset that fell 35% in the 2008 bear market to be a safe haven. Especially given gold’s volatility in the last 10 years, investors should know that gold at this point looks more like a speculation than safe haven investing.

That does not mean we don’t believe you should have some allocation to gold as a protection against an all out fiat currency collapse, just know it will be volatile.

U.S. Treasuries

U.S. treasuries carry two risks; one is the default of the U.S. government which is highly unlikely, while the other is inflation which is not so unlikely given the continuous monetary easing. Therefore, in order to really look for a safe haven, TIPS (Treasury Inflation-Protected Securities) should be examined.

If inflation hits 2% or more, 30-year treasury yields would give a negative real return. On the other hand, TIPS have a much lower yield, with the current spread at 162 basis points which is amongst the lowest spreads in the last five years but would keep giving you a positive real return in inflationary circumstances. The current difference of 1.62% is a lot, but protection always comes at a cost.

figure 3 tips vs yield
Figure 3: 30 year treasuries vs. 30 year TIPS – yields. Source: FRED.

The difference in yields demonstrated in the figure above is pretty high which suggests thinking about diversification in the safe haven bond portfolio. As the main rule of investing is not to lose money, TIPS should be considered.

The Swiss Franc

The Swiss franc (CHF) is similar to gold, when things get rough people flock to it, but you have to sell quickly when things get better. In August 2011 the CHF surged due to contagion fears related to the European debt crisis, but it quickly returned to previous values.

figure 4 chf
Figure 4: USD per 1 CHF. Source: XE.

The CHF is not a long term safe option as it is very volatile and does not provide long term protection.

Defensive Stocks

Defensive stocks usually perform well at the beginning of a bear market but are dragged downwards in later stages as investment funds get tight on liquidity. Defensive stocks can be found in the utilities sector and consumer staples. In the current environment, if you have two stocks with similar valuations and yields you might want to choose the more defensive one as it will limit your losses should a bear market arrive.


Talking about risk is always thankless, you become the grumpy fellow at the party while everyone else is having fun. But investing shouldn’t be about fun, it should be about creating sustainable long-term positive returns.

In this article we have discussed how some safe havens are not that safe due to their volatility and speculation around them, like gold and the Swiss franc. Being protected always comes at a cost which is relatively high when comparing treasuries and TIPS, but it is necessary as global monetary easing and stimulus continues.

The main conclusion is that you have to assess your risks for the returns you are getting. The S&P 500 is up only 4.9% per year in the last 24 months, so consider if those meagre returns are worth the risk of losing more than 20% if a bear market comes along.

The best protection should be diversification that includes TIPS, gold, defensive and growth stocks, domestic and emerging markets. If you continually rearrange the weights in order to minimize risks, you can for certain outperform the market with less risk.



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.



Could It Be A Good Idea To Invest In Japan? There’s Upside Potential…

  • Price to book is 1.1 and price earnings ratio is at 15.
  • More monetary and fiscal stimulus can be expected.
  • Even if the economy doesn’t pick up Japan is relatively cheap.


We read a lot about how Japan has been in an economic slump for the past 30 years, how incredibly large amounts of quantitative easing have not triggered inflation, and that Japan should be avoided as an investment opportunity.

In this article we are going to see if any of those concerns have merit by looking at the economy, financial markets, fundamentals, currency risks and rewards in order to estimate the rationality of internationally diversifying our portfolio with Japanese stocks.

The Japanese Economy

Japan was an Asian tiger the 1980s and the burst of the 1989 stock market bubble practically eliminated economic growth. Short growth periods are consistently leveled out by recessions.

figure 1 japan gdp
Figure 1: Japan’s GDP growth. Source: Trading Economics.

Even with no GDP growth, unemployment in Japan—which currently sits at 3.2%—is very low. Not as low as it has been historically, but still relatively low when compared to other economies like the U.S. with 4.9% or Europe with 10.1%.

figure 2 japan unemployment
Figure 2: Japan’s unemployment rate. Source: Trading Economics.

Japan is suffering from the same disease as most of the other developed economies, an aging population. The labor force participation rate is slowly but steadily declining and is currently at 59.8% (U.S. 62.7%). As a consequence, labor productivity in Japan has been declining for the last 10 years.

In order to bring the Japanese economy to a more stable growth path the prime minister, Shinzo Abe, has embarked on an incredible quantitative and qualitative easing plan. The easing consists of pushing the interest rate below zero and purchasing stocks and bonds on the open market with the goal of bringing liquidity to the market and hopefully spurring  inflation. The current interest rate is minus 0.1% and the Bank of Japan has largely increased its balance sheet in the last few years.

figure 3 balance sheet
Figure 3: Bank of Japan balance sheet and interest rate. Source: Bloomberg.

Monetary policy isn’t the only reason for such a drastic decline in yields. Because the Yen is considered a safe haven, Japanese securities are often used as collateral. This keeps demand high, which also helps to keep rates low. Even still, this has not been enough to spur inflation and now there are even rumors, seeing how inflated the Bank of Japan’s balance sheet is, that it has limited maneuvering space for more quantitative easing. But, Former Federal Reserve Chairman Ben Bernanke rejected this notion as he met with Shinzo Abe to discuss how Japan can beat deflation and implement more qualitative and quantitative easing. The idea is to use “helicopter money” where a central bank directly finances government spending and tax cuts which should inevitably lead to inflation.

There is no guarantee this will happen, but seeing that Japan has had a decade of deflation, anything is possible. As investors, we should look for investments that will do well in an inflationary environment with high levels of monetary easing.

Current Market Situation

Neither the Japanese economy nor the stock market has grown much in the last few decades.

figure 4 nikkei index
Figure 4: Nikkei index. Source: Yahoo Finance.

However, in the last 5 years it has risen 100% when calculated in the Yen. But given the strong depreciation of the Japanese yen in the last 4 years, it only equates to a 60% rise in US dollars.

figure 5 yen usd
Figure 5: USD vs YEN since 2006. Source: XE.

Over the last few months the Yen has actually appreciated against the US dollar. But new easing possibilities might once again lower the value of the yen, which in the last week alone depreciated 4% against the dollar. Investors have to be careful here and differentiate what is real market appreciation or just currency depreciation that affects the Japanese stock market. On the other hand, as the above two figures show, the stock market moves in sync with the currency thus there is at least some protection, currency wise.

From a global valuation perspective Japan is undervalued. Knowing that many products that we use on a daily basis are made by Japanese companies, it might be a good idea to dig deeper into Japanese stocks.

Japan’s Cyclically Adjusted Price Earnings ratio (CAPE – uses 10 year earnings average) is at 20.7 while the U.S. the ratio is 24.7. The normal PE ratio for Japan is also relatively low at 15.2 which is one of the lowest PE ratios in the developed world.

figure 6 global PE ratios
Figure 6: Global PE ratios. Source: Star Capital.

In the long term, investment returns are correlated with underlying earnings, therefore diversifying internationally with cheaper Japanese businesses makes sense. Especially since many of these businesses operate globally. Plus, Japan has a strong legal system, is transparent and has a long positive history towards international investments.The iShares MSCI Japan ETF has an even lower PE ratio of 13.09 and a Price to Book value of just 1.16 which are both much lower than the iShares S&P 500 Core ETF with a PE ratio of 19.55 and a price to book ratio of 2.8.

Future Potential Catalysts and Risks

The first potential boost the Japanese stock market might get is from the new easing program where the central bank will directly give money to the government. This could weaken the yen and make Japanese products cheaper.

The second boost might come from increased fiscal stimulus. The prime minister already delayed the higher consumption tax implementation and more measures should be expected.

The third potential catalyst could come from better corporate governance. Japanese companies have lots of assets sitting on their balance sheets, including cash, and there is a slow trend towards more buyback programs and higher dividends, although this not the usual way Japanese companies operate.

There is always the risk that the stimulus might not work and that Japan returns to the familiar cycle of slow growth with constant recessions. If that turns out to be the case, the low valuations and attractive Price to Book values Japanese companies have, should provide some downside protection. And the fact that many Japanese companies operate globally further mitigates country risk.


In hindsight, it is always easy to explain what happened. Maybe in a few years people will look at the extra returns generated from Japan as pure logic, seeing that the PE ratio is much lower than the rest of the developed world and balance sheets much stronger.

Unfortunately, investing is not done in hindsight. It takes courage to invest in something where it looks like everything should turn out well but has not yet happened. Given the fundamentals and macro trends, Japan might just be the perfect example of how markets tend to be irrational for longer periods of time, allowing patient investors to make extraordinary returns.



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 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.

3 figure 536px

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.

4 figure 536px

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.