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September Newsletter - Global Economy, Still good but not as good as it was

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We are of the opinion that the current global economic conditions are likely to remain favourable over the coming six to twelve months. That being said, there is reason for caution. While recent investor sentiment has been influenced by the 4 T’s – Turkey, Trump, Tariffs and Trade, so far none have had a meaningful impact on broader economic conditions. While we anticipate a 12 month period of relatively positive performance, there is good reason for caution and therefore some alternative positions.

 

Many of the indicators that we watch are still positive from an historic basis. Namely, unemployment, interest rates and inflation. This is particularly true in the U.S. where it is easy to be distracted by 3 of the four T’s.

 

To give comfort to those who may have worries that the current, longest ever, bull market run may come to an end, let’s take a look at a slightly different measure, the Purchasing Managers Index or PMI. Fundamentally the PMI is an indicator of economic health for manufacturing and service sectors. Put simply, if you make widgets and you have incoming orders for more, you have to purchase more inventory to make the widgets to sell. It seems to be a fairly good measure of the economy and therefore earnings and then equity markets.

 

This index provides a measure from 0 to 100. If over 50, it is a positive indicator, under 50 not so good. It tends to range between 40 and 60. Beyond that are outliers.

 

These are two pictures that we would like to share with you on the subject. One is a global measure which includes all of the developed countries like us. The second is a “heat map” globally. On the second one, the numbers and names aren’t as important as the colour. Green is good. In the countries that we are currently in favour of: US, Europe and Asia, then Canada. All good. All above 50.

 

Examine the following. Keep in mind that for the second chart, you just squint your eyes and look for the green (>50);

 

 

In summary, we continue to prefer equities over fixed income (bonds) We prefer U.S. equities over International, which includes only Europe and Asia at this time. Canada is an energy driven economy which appears to be in a price range. Not up, not down, but flattish.

 

If you would like further clarification, call or e-mail. If you would like a dissertation on 10 year vs 2 year bond spreads and would like to see Zoe kick Scott under the table, we would be happy to oblige ;o)