Global stocks took a dive this year. While the U.S. market is doing Ok, up 5% year-to-date, global equities (the MSCI ACWI ex-US index) plunged 9% this year, and emerging markets crashed 15%:
The reason for this global selloff is economic decoupling – deteriorating economies in many parts of the world except the U.S. Our GDP growth accelerated to 4.2% in Q2-2018 as a result of President Trump’s pro-business, pro-growth policies. Meantime, the EU growth slowed to an anemic 1.2% annual rate in Q2, and China’s Q3 GDP growth was just reported at 6.5%, its slowest since 2009.
The decoupling is even larger when we look at more timely indicators. U.S. ISM purchasing manager surveys surged to record levels in the past two months:
But Europe’s manufacturing ISM is falling rapidly, the latest at 53:
Investors likely haven’t heard about this. Most financial media and investment bank research don’t mention it because it doesn’t fit their globalist narrative. They still speak in terms of “global growth.” In my view, 2018 will go down as the year when the concept of synchronized global growth became outdated.
We at Model Capital expect global economic decoupling to continue into the end of 2018. U.S. growth is expected around 4% in Q3, and the strength to continue into Q4.
On the other hand, global ex-U.S. growth to continue to slow down. Trade gains will diminish for exporter economies including Germany and China, due to the new U.S. fair-trade policies. This already affects their manufacturers, evidenced by the falling ISM surveys. In addition, interest rates are still near zero in much of the developed world: 10-year Bunds are at 0.46% today, and 10-year JGBs at 0.15%. An eventual end of monetary stimulus will have a negative effect, possibly severe. Lastly, their fiscal situation looks increasingly fragile – for example, Italy was downgraded by Moody’s to Baa3, one notch above junk. We see a significant chance of recessions in weaker European and Asian nations early in 2019.
What does it mean for a typical investor’s portfolio? Investors should continue to avoid global stocks, and especially emerging markets. Of course, keep your portfolio diversified – but invest close to home, within the U.S. Follow us on Twitter for regular fundamentals-based insights on stocks and bonds.
Roman Chuyan is the president and general partner of Model Capital Management LLC (“MCM”), a Registered Investment Adviser. This article is for informational purposes only. There are risks involved in investing, including loss of principal. Roman Chuyan makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or MCM. There is no guarantee that the goals of the strategies discussed in this article will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any security.
Certain figures in this article represent return forecasts or outlook for certain asset classes and not for any strategy, and are not a guarantee of future performance. These forecasts are forward-looking statements based on numerous assumptions, risks, and reasonable beliefs of MCM, which change over time. They speak only as of the date they are made, and MCM assumes no duty to update them. Actual results may differ materially from those anticipated in forward-looking statements.