Thomas White Global Investing
Global growth could get a lift from higher fiscal spending

Global Overview

November 2016

Global growth could get a lift from higher fiscal spending

U.S. equity investors quickly set aside their initial fears about the surprising presidential election result, and have become more hopeful of pro-growth economic policies from the incoming administration. In addition to the promised investments in public infrastructure, markets now expect fewer regulatory restrictions on banking and other sectors, as well as lower corporate taxes. U.S. equity prices advanced after the election and outperformed most other markets on expectations that the new policy measures could lift economic growth. International markets were weak during the month as investors turned more optimistic about U.S. assets. It is now widely believed that the stronger U.S. Dollar and the restrictive trade policies expected from the new U.S. government could hurt international assets in the coming quarters. In Europe, the European Central Bank extended its bond purchases for another nine months but at a reduced monthly outlay after March 2017.

Global equity prices ended November with marginal gains as the positive trends in North America were mostly offset by the decline in other regions. Global manufacturing activity strengthened further in November to the fastest pace in more than two years. Most major economies including the U.S., China and the Eurozone reported gains in factory output, while new order flows were also healthy. Growth in the global services sector was at the most vigorous so far this year, helped by gains across most large economies. Crude oil prices received a boost from the decision by OPEC, a group of oil producers, to limit production.

 

Global industry spotlight for the month: Automobiles

Global auto manufacturers are seeing a slowdown in demand growth across major markets, after several years of sustained gains. The weakness is more visible in passenger sedans as consumer preferences have clearly shifted in favor of SUV’s. The increased longevity of vehicles could also be playing a part, as replacing older vehicles has become less compelling. In large cities, people are now less keen to own cars and are relying more on ride share services. Some manufacturers are seeing this as an opportunity to grow sales by signing supply deals with the ride share companies. The rising popularity of electric and, possibly, autonomous vehicles, could drive future growth for the global automobile industry.

Several of the leading global car makers, especially companies based in the U.S. and Europe, have seen a deceleration in volume sales in recent months. After years of robust growth since the industry recovered from the 2008 global recession, a gradual cooling off in demand was expected. Low interest rates and improving labor markets probably delayed the current phase of softer demand, in the U.S. as well as most countries in Europe. Growth has also slowed considerably in China, the world’s largest market by volume, as the country is battling severe traffic congestion in its major cities as well as high pollution levels. Consumer demand in some of the other emerging countries was hurt by the downturn in the commodities cycle, which led to lower household income growth.

However, much of the demand growth deceleration has happened in the passenger sedan segment, especially for luxury sedans. Most manufacturers continue to see healthy demand for SUV’s and crossover vehicles, which have attracted more consumer interest. These larger vehicles are now nearly as fuel efficient as sedans and offer more utility. Manufacturers are now rethinking their product pipelines, rushing to make available more SUV’s to the market in the shortest possible time.

The future emission norms set by regulators in the developed countries are expected to drive further efficiency gains in engine technology. These standards are likely to get tighter over the next several years, unless there is a sharp change in regulatory priorities. As manufacturers are required to meet the average norms across their fleet, these regulations would force the car makers to aggressively promote their smaller and more efficient vehicles.

Another option for manufacturers to meet tighter emission norms is to increase their electric vehicle offerings that are non-polluting. However, outside the luxury segment, few manufacturers have so far been successful in launching electric cars that are attractive for customers. Technology remains an impediment, as the travel range of affordable electric cars are limited. The absence of a large network of recharge stations continues to discourage most potential buyers. The cost of batteries is another problem, but this could change in the future when large battery manufacturing facilities become operational.

The rapid growth of ride sharing services was seen as a threat to car manufacturers; as such services could discourage people in cities from owning cars. This is more likely among younger consumers, who also prefer public transport and live closer to work locations. Nevertheless, some manufacturers now see ride share services as an opportunity to grow their fleet sales. These manufacturers have signed exclusive supply contracts with the ride sharing companies, and offer attractive financing on new cars to drivers. This could partly offset the decline in demand, but is unlikely to fully address the decline in sales volumes due to changes in consumer preferences.

 

 

 

 

 

 

Use of this site signifies that you have read Terms & Conditions
© Thomas White International, Ltd. 2017