Clouds hover over the second half outlook
THE last three months have seen a step-change in global markets. After a boom fuelled by fiscal stimuli, financial markets have fallen as governments plan to scale back their support, and the period has been punctuated by a flight to quality assets. So, what should contract for difference (CFD) traders concentrate on as we enter the second half of the year?
There are growing signs that clouds are gathering on the economic horizon. Firstly, Europe’s debt crisis is far from resolved. Analysts at Saxo Bank argue that the only remedy is for government’s in Europe’s troubled states to “cut budget deficits much quicker and much more dramatcially than what is currently being done”. This lack of decisive action is particularly worrying they say, because “running big budget deficits kills growth – and that is especially true in a cash strapped environment like the one we are currently in”. So, until these imbalances have been healed, growth in Europe will remain on the back foot.
Secondly, it’s not only Europe that has growth fears, this has now spread to China and the US. Jim O’Neill, chief economist at Goldman Sachs, put the heebie-jeebies into investors at the weekend by expressing his concerns at the weak tone of economic data coming from China and the US. Housing data, revised GDP and employment figures from the US along with weak industrial signals coming from China have weighed on markets. What’s worrying economists such as O’Neill is that if the US and China – the two biggest forces in the global economy – slow significantly this year it would undoubtedly de-rail the global recovery. If the world economy has a double-dip, or significant slowdown, this would have repurcussions on stocks, bonds, commodities and global exchange rates.
Fears for global growth should ensure that the safe haven theme, which has gathered strength in recent weeks, will hold and boost gold along with US Treasuries, the yen and the Swiss franc.
Although clouds hover on the macro horizon, there is positive news for equity markets. Positive corporate earnings for the second quarter, which will be released during the next few weeks, should provide a short-term stimulus to stock prices. And even a double-dip need not be a catastrophe for stocks. Analysts at Saxo Bank have found that in the past corporate earnings have not been hit as hard during the second slowdown in a double-dip. For example, in the US in the 1980s the second economic contraction was more significant than the first, but corporate profits fell by less. The reason for this is that management become adept at cutting costs during the first slowdown making businesses more efficient as they enter they the second phase of the downturn.
In the absence of a reliable crystal ball, the best way to position your portfolio is to look for companies that have cut costs but also boosted sales growth – this is a good measure of efficiency. The next six months are crucial for the global economy, and with so many unknowns, portfolios should concentrate on quality assets.