Jefferies

Economics and Strategy

A Ray of Sunshine

— Sean Darby, Global Head of Equity Strategy

Global equities produced broad-based US$ returns through the third quarter. A weak dollar, firming commodity prices and expanding Purchasing Managers' Index (PMI) numbers lifted global indices despite the tensions on the North Korean Peninsula. While the developed world central banks are talking tighter policy, Brazil loosened rates by 100bp. Relaxed monetary policy in EM is helping global trade to recover and providing a useful backstop to growth. We believe equity markets are benefiting from a ‘disinflationary boom’ (i.e., low inflation that keeps central bankers on hold alongside blossoming growth).

The rising tide of growth has lifted many boats – shipping, shipbuilding, copper steel, as well as silicon wafer makers – industries that many investors had written off 24 months ago. Even Greece’s PMI manufacturing hit a nine-year high in August! Aside from better growth, one of the more visible improvements has been better capex and also the first signs of higher wages. After a long period when companies hoarded their profits, there is evidence that the money is being recycled into the economy through investment spending and better remuneration. This is great news for equity markets.

China continues to run a loose monetary and fiscal policy, underwriting domestic profits, while Japan’s earnings appear to have been less influenced by a weaker yen. In Europe, the strength of the euro has become a concern but intra-European trade has picked up while retail sales remain firm. Meanwhile U.S. multi-nationals have enjoyed a renaissance helped by the week greenback.