Humberto Garcia spoke to Forbes about his thoughts on Mexico’s economy.
Forbes, March 14, 2018
By Kenneth Rapoza
Political chaos? The market doesn’t care. At least not yet. It’s the tenth anniversary of the longest bull market in history, and the Organization for Economic Cooperation and Development (OECD) says, like every other multilateral institution out there, that the global economy is firing on all six cylinders.
So while antiestablishment populists are gaining ground in Germany and Italy; and while Trump’s Washington continues to be a chaotic ball of stress for most observers, the developed world is on target for another year of growth. The emerging market world in countries like Brazil, Russia, India and China are pushing world GDP higher, right along with them.
The OECD said Tuesday that the world economy will grow at its strongest level in seven years thanks to tax cuts in the U.S. and elsewhere, but warned that trade wars would upend it all.
Trump said on Tuesday that he wanted to slam China with more tariffs. While some in the market believe these are mere negotiation tactics, no one likes to hear these things. It makes most market participants wary.
OECD is forecasting growth of 4.1% for the G20 nations, beating 2011 growth of 3.6%. World growth is forecast to come in just under 4% for the next two years.
“Growth is steady or improving in most G20 countries, and the expansion is continuing,” OECD chief economist Alvaro Pereira says.
Some of the biggest gainers in the developed world include Australia (3%), the United States (2.9%) and Germany (2.4%). Within the emerging markets, India (7.2%), China (6.7%) and Indonesia (5.3%) are expected to lead the pack.
One might think that political uncertainty would have pulled a rug out from under businesses of any size. If there is any decoupling going on out there, it might be the private sector (companies and financials) pulling away from the public sector (the loony bin).
So long as politicians cut taxes and regulations, a little inflation and higher rates are no match for what some contrarian investors still believe is irrational exuberance.
Portfolio managers have been inching out of the U.S., which is expensive on a valuation basis, but are finding lower-priced, high-quality assets elsewhere. Emerging-market countries have been staging a comeback now for at least 12 months. This can be seen in the flow data tracked by EFPR Global in Cambridge, Massachusetts. Fund flows into emerging-market stocks and bonds continue unabated despite Trump tariff talk, the Fed rate hikes and previous concerns that Trump would get us all killed in a nuclear war with a nation that currently has no nuclear bombs — that being North Korea.
“China is of particular interest to our fund,” say Ivy Emerging Markets Equity Fund (IPOAX) managers Jonas Krumplys and Aditya Kapoor in a report published on their website recently.
Brazil and Russia are coming out of the doldrums. Both suffered severe recessions in back-to-back years, but are now in growth mode. Equity valuations remain low in both countries, with Russia lower than usual due to sanctions and the ongoing Russian collusion investigation, which may yet lead to even greater sanctions if the Special Counsel finds anything damaging.
Like Russia, Brazil is a commodity producer. A stronger global economy means more demand for energy, which Russia has, and iron ore and food, which Brazil has.
“Brazil is steadily emerging from its deepest recession ever and although unemployment is stubbornly above 10%, it has declined in the last half of 2017,” says Humberto Garcia, head of global asset allocation at Bank Leumi USA. He is bullish on Brazil, adding that consumer confidence is improving and inflation under control at a very low 3.5%.
Meanwhile, in the U.S., the economy is dependent on a number of factors.
A trade war could result in a level of commercial sparring not seen in years, whereas Trump hikes import duties on one product and another nation does the same with a U.S. import. Costlier imported goods impact inflation as Americans pay more for things that make up the Consumer Price Index, a key inflation indicator used by the Fed.
BNP Paribas is forecasting 2.3% inflation in the U.S. this year, falling to 2.1% next year. They think the Fed hikes four times, not three.
If midterm elections don’t go Trump’s way, and all indicators suggest the Republicans lose the House in November, Democrats would likely move to impeach or set up roadblocks to Trump’s tax overhaul. It is unclear how that would unfold, but it would be a market negative. So far, Wall Street has yet to turn on Trump. They have been praising Republican tax cuts and Trump’s regulatory rollback all year. That could change quickly if Wall Street smells blood in the water, and thinks his days as president are numbered.
Political factors outside the U.S. will also affect the market and possibly national economies, Ivy fund managers believe.
Russia, Mexico, India and Brazil are all facing elections this year. Political reform in those countries is a key driver for global growth.
“The global boom has picked up pace, and economies seem like a pack of speed skaters, chasing each other to go faster,” says BNP Paribas economist Paul Mortimer-Lee. He revised his growth outlook for 2018 by 0.2 percentage points to 3.9%.
Unlike OECD economists, he thinks this is the top of the global cycle. Growth slows in 2019.