Monday, June 6, 2011

Recent Weakness a Mid Cycle Slowdown?

According to the media we are seeing hard evidence of a global slowdown. Now, Global equity markets have been weak so I’m wonderingly out loud whether this is another case of the media fitting the ‘facts’ to the story? Are we seeing the beginnings of a global slowdown or is this a typical mid cycle moderation in growth?
From my perspective, I’m market neutral, so the most important thing to me is to identify the outperforming trends and themes rather than making an overriding decision about markets direction.  Nevertheless, a key aspect of this is taking a view on where the global macro economy is going.
I suspect that the answer to the question in the first paragraph is that this is a mid-cycle moderation with some special circumstances.
Firstly, the short term data on employment indicates that the current situation remains positive. You can access the American Staffing Association data here and it is indicating ongoing employment gains.
Secondly, the Association of American Railroads is reporting steady weekly rail traffic here

So, no collapse just yet.
Thirdly, I suspect that the tightening attempts within emerging markets seem to have caused a moderation in inflation with commodities...

This should be good news for lower income consumers who have been feeling the pinch recently. Indeed, this recovery has been characterised by the weakness in discretionary spending power of the lower income groups. We can see all of this in the latest US retailer’s monthly sales figures. The high end companies like Nordstrom, Saks, Coach and Macy’s reported good numbers whilst the lower end companies like Costco or Limited Brands gave disappointing numbers.
However, given moderating commodity prices and increased employment gains it is highly likely that some of the stocks set to outperform expectations will come in the kind of beaten up lower end discretionary space in the US. In addition, this increased spending power should encourage some spending which will create growth longer term.
So, in summary this looks like a mid-cycle moderation which creates opportunities for stock pickers exposed to the right sectors. Global manufacturing has had a great growth run but this is largely due to the base effect caused by severe capacity cutbacks in the recession. Investment in Machinery and Equipment (IME) fell off a cliff in the recession but has come back strongly in the recovery. I suspect know it is time for the growth leaders to shift to more mass consumer discretionary names.

Indeed, the latets JP Morgan Global Manufacturing and Services Report found here  says a similar thing, albeit wth some expected slowdown in manufacturing due to Japan.


No comments:

Post a Comment