The 300 Foot View: U.S., Europe and China Still Struggling

Recently I was discussing the current investment environments in the U.S., Europe, China and Emerging Markets with a few of my Pioneer colleagues. The fact of the matter is, there haven’t been a whole lot of changes in the critical issues out there facing the markets, but I thought I’d provide a summary, just to keep things in perspective.

In the U.S., It’s All about the Politics

If you think about the slow-growth environment, the stop-start nature of economic activity, the lukewarm consumer confidence and the issues with business spending, all of these frankly revolve around the uncertainty over the political landscape. Once the election is over, we think we’ll see a higher level of clarity on which party is in power and what they plan to do about the various issues facing us including fiscal spending and the taxation policy, which is in my mind is the most critical element of the uncertainty facing both businesses and consumers.

Everything’s Quiet in Europe for Now.

I think this is the first August in the last several years where it’s been quiet rather than the market faltering, and we have Mr. Draghi to thank. He appears to have settled nerves with what I like to describe as his LTROs for sovereign debt. What he proposed is buying the short-end of all the sovereign debt curves that are outstanding to provide liquidity and then providing the funding when these sovereigns (think Portugal, Spain or Italy) are rolling over.  Nevertheless, we’re still waiting for the details to be worked out. This, of course is a risk to the market.  

 China is Looking a Little Worse

Their economic activity is much lower than we were expecting. I think we’re still in somewhat of a soft-landing camp, but clearly there are risks to the downside there. We are seeing much weaker exports than we were expecting. The last number reported exports were down 25%. This is dramatic stuff if you think about the way that the Chinese manage their economy; it’s very much command and control. To a large extent they have much more control over parts of the economy than the U.S. does. That’s the good news; the bad news is that, when there’s something they can’t control, they have a harder time responding to it. And so, what has gone south this time is the export engine.

We do believe that China is in the process of bottoming, but that’s not going to be a growth driver right away.  Leave that to the emerging market countries where the central banks and balance sheets are still able to do what central banks can do, and that is lowering interest rates through normal monetary mechanisms. So from that standpoint we’re feeling confident that the emerging markets in 2013 will be supporting global growth and helping both the U.S. and Europe in that case.