In the spirit of object-driven visualization: segmenting markets on the basis of sectors I do / do not have exposure to and key themes I’m currently following.
Given the volatiltiy resulting from the unexpected Brexit vote, I’ve logged a few important considerations associated with SP500 valuations during the next few months:
- Even if the UK fell into a recession, which is a distinct possibility, the direct knock-on effect on global GDP through lower UK import demand would be minimal as the UK accounts for only 3.6% of global imports of merchandize goods and 4.1% of global imports of commercial services
- Business investment around the globe is likely to be dampened somewhat due to the heightened uncertainty about the global implications of Brexit and the tightening of financial conditions…Nicola Mai estimates a negative impact on GDP of around 0.3%. The effect on the U.S. and other regions would likely be smaller
Related “Swing” Factors
- Further strengthening of the dollar in response to global risk aversion would be a problem not only for U.S. growth prospects but also for all the dollar debtors in emerging markets, and could also push commodity prices lower
- China might react yet again to dollar strength by allowing a more rapid depreciation of its currency against the greenback, which could intensify global growth and deflation concerns
- …we anticipate further action by virtually all major central banks to limit the potential damage.
- We expect the Bank of England to cut its official interest rate from 0.5% to zero relatively soon and, if more is needed, to restart quantitative easing
- 50:50 chance on additional European Central Bank easing before Brexit
- Bank of Japan easing at the next policy meeting on 29 July and sees a high probability of currency intervention to weaken the yen in the near future
- …in the U.S., a July hike is now completely off the table, September is not impossible but a low probability because the dust from Brexit may not have settled yet and the U.S. presidential race will be in full swing
Most importantly, investors will have to factor in a higher chance of a stagflationary outcome over the next three to five years: even lower growth or near-stagnation coupled with a significant rise in inflation
- Current or future governments turn more protectionist by erecting barriers to trade and migration…
- …and take up or intensify the battle against inequality by redistributing income (through taxation and regulation) from capital to labor.
Source: Barrons (June 2016)
- …research suggests that within the burgeoning middle class, the upper middle class is poised to become the principal engine of consumer spending over the next decade….a new, more globally minded generation of Chinese will exercise disproportionate influence in the market.
- Along with affluent and ultrawealthy consumers, upper-middle-class ones are stimulating rapid growth in luxury-goods consumption, which has surged at rates of 16 to 20 percent per annum for the past four years
- …many G2 consumers were born after Deng Xiaoping’s visit to the southern region—the beginning of a new era of economic reform and of China’s opening up to the world. They are confident, independent minded, and determined to display that independence through their consumption.
- …They are also more likely than previous generations to check the Internet for other people’s usage experiences or comments. These consumers seek emotional satisfaction through better taste or higher status, are loyal to the brands they trust, and prefer niche over mass brands
- …middle-class growth rates will be far greater in the smaller cities of the north and west. Many are classified as Tier-three cities, whose share of China’s upper-middle-class households should reach more than 30 percent by 2022, up from 15 percent in 2002.
Source: McKinsey (June 2013)
- Growth in spending on annual discretionary categories in China is forecast to exceed 7 percent between 2010 and 2020, and growth of 6 to 7 percent annually is expected in a second category of “seminecessities.”
- Growth Rates, from 2010 to 2030:
- Transportation and Communication: 15-20%
- Recreation, education, and culture: 15- 21%
- Growth Rates, from 2010 to 2030:
Source: McKinsey (May 2015)
- When asked about their expectations regarding future income, 55 percent of consumers we interviewed were confident their income would increase significantly over the next five years
- They are allocating more of their income to lifestyle services and experiences—over half plan to spend more on leisure and entertainment (the 50 percent surge in box-office receipts in the past year is just one indicator of that trend).
- Chinese consumers are also increasingly trading up from mass products to premium products: we found that 50 percent now seek the best and most expensive offering
- Two-thirds of Chinese consumers say that shopping is the best way to spend time with family, an increase of 21 percent compared with three years ago. Malls—which combine shopping, dining, and entertainment experiences the entire family can enjoy—have benefited most from this trend
- Consumers also reinforce family ties through travel: 74 percent of consumers say it helps them to better connect with family, and 45 percent of international trips were taken with family in 2015, compared with 39 percent in 2012. More than 70 million Chinese consumers traveled overseas in 2015, making 1.5 trips on average, and shopping is integral to this experience. Some 80 percent of consumers have made overseas purchases, and nearly 30 percent actually base their choice of a travel destination on shopping opportunities.
The Chinese consumer is evolving. Gone are the days of indiscriminate spending on products. The focus is shifting to prioritizing premium products and living a more balanced, healthy, and family-centric life.
Source: McKinsey (March 2016)
- Sales tax: Finance Minister Taro Aso explained Tuesday that “the biggest problem is that private consumption hasn’t risen,” making now not a good time to raise the levy.
While these are positive moves, there are still improvements that need to be made in high speed mobile data and security as heavy data usage will require more 4G/LTE antennas and IT infrastructure across the region.
– Shafiq Arghandiwal, Director of Technology, Matthews Asia
Identify beneficiaries of telecom and IT infrastructure companies in Asia
Commercial banking money: