Investors, the glass is more than half full
The other day, I received an invitation to participate in a large conference from a very well-known Danish organisation, and I was naturally happy to receive the invitation. The invite began with the statement that “the global crisis has now hit Denmark”, which I think is very telling about how the global economy is perceived in Europe right now, but I perceive the world somewhat differently.
Stock markets around the world are still up by 7 to 10 percent for this year, which by no means is bad, and the increase has so far been maintained. It reveals a certain strength in the financial markets, but in many of the conversations I have with investors and business leaders from Europe, it is characteristic that people still do not dare to believe that the good will last; they believe on the contrary, actually.
The most obvious thing to me is that many positive developments in the financial markets, including the stock markets, have not yet been taken into account. So, what happens if stock markets rise another 5 to 7 percent?
My immediate answer is that even then, investors will not be ahead of the curve in buying back the shares they sold last year. This continued bias in the financial markets alone is a strong argument for me to maintain the recommendation from last October to increase risk in the investment portfolio. However, the global crisis has an even greater weight – the global crisis that simply is no global crisis.
Assessing the glass?
My assessment of the global outlook shortened down to a paragraph has, if anything, also improved slightly. Asia represents 40 percent of the world’s total GDP (in 2030, it will be 50 percent), which this year will grow by approximately 5 percent. Concerning Latin America, the outlook is mixed, but I have become more positive about the continent’s largest economy, Brazil, as the newly elected president Lula de Silva has not surprised the financial market negatively. China’s reopening probably means a greater import of raw materials from Brazil.
I remain comfortable with the world’s largest economy, the US, as long as housing prices do not fall by more than 5 percent further from the current level, which is slightly more positive than I have previously assessed the US.
Europe is left with, in reality, a series of self-created crises piling up and with no prospect of them being resolved. For me, that assessment is not new but a repetition. From a European point of view, it may well feel like a global crisis, but it is equivalent to making a national weather forecast on the basis of what one observes by looking out the window. On the contrary, my assessment is that the world is moving forward.
These two assessments alone – that investors are still currently caught on the negative footing while the markets remain slightly bullish and the fact that the global economy as a whole is moving forward again – is enough for me to consider the glass more than half full.
Unfortunately, the biggest unknown factor, globally, also origin from Europe, namely Russia’s war against Ukraine. Back during the autumn, the development showed continuous good news about Ukrainian advances and a Russian weakness, but the news flow has changed lately, and it could become a serious threat to the continued positive development in the stock markets.
For realpolitik reasons, the West cannot have a situation where Russia will get some sort of victory over Ukraine. Therefore, the conflict is moving towards a battle between realpolitik and madness. If the current reports are to be believed, then the risk is that Eastern Ukraine can become a real battlefield with up to several hundred thousand fallen. The world is not ready for that, and it will further dampen all activity throughout Europe, both private consumption and investments. Of course, it will also be negative for the stock markets in general, and the potential for this absolutely terrible scenario is what I currently consider to constitute the greatest threat to the predominantly positive global outlook.
Filling up the glass
In my view, the factor that will once again drive the world economy further forward is private consumption. Now, not entirely by coincidence, I have selected two graphs that fit my predominantly positive assessment, but the argumentation is not entirely beside the point. As it can be seen from graph one, joy is returning to American consumers with great speed. Increasing private consumption in the US, which is a simple and incredibly important factor in the world’s largest economy, can counter a lot of other negative developments.
The good news is that it is not only in the US where consumers see life in a brighter light. This applies very widely in Asia, where graph two shows a convincing development in India. The same applies in many other Asian countries, such as the Philippines, Indonesia, Malaysia, Thailand, and more. One country I have not mentioned is China, where consumers still view the outlook as more modest than usual. It is one of the Chinese government’s major tasks to create a policy that brings confidence back to consumers. Otherwise, China’s GDP is will not grow at the desired rate, so this is a crank, along with the war in Ukraine and house prices in the US, if the glass needs to be filled up more.
