According to investment guru Marc Faber, there?s a bear market in the making. His point is a simple one: if the bond market is telling you that the economies of the Western world are weakening but, at the same time, the stock market is still relatively high, the stock market is vulnerable.
Clearly with the growth outlook bleak for both the US and the Eurozone, there?s not much to look forward to in terms of earnings growth. And it?s going to be a while before unemployment tapers off. Indeed although earnings season, for the June 2011 quarter, in the US got off to a good start, numbers for a whole host of heavyweights came in below estimates leading analysts to conclude that the first quarter results may have been something of a flash in the pan. So although US has hammered out a solution to its debt crisis, raising the ceiling of $14.3 trillion to beyond November 2012 and will pare the deficit by $2.1 trillion, worries about a delayed global economic recovery loom large.
The concern among investors is that it could be tough for the US and Europe to pare debt and also stimulate growth. European banks like BNP Paribas and Barclay?s have announced tepid numbers with the latter also talking of job cuts, as did HSBC before it; with the exception of Germany perhaps,the Eurozone remains quite fragile.
An unexpected decline in July consumer spending in the US has left analysts reworking estimates for a strong second-half rebound; fingers are crossed ahead of the July employment report expected later in the week. So jittery are investors that there?s a scramble for US Treasuries and German Bunds ? yields have been driven down to their lowest levels since November and ten-year bonds in the UK hit their lowest ever yields in history.
As for China, while a hard landing has been ruled out after the better-than-expected GDP growth for the June quarter at 9.5%, there is some concern on whether food inflation would force down local demand. A slowdown in China would only mean downward pressure on prices of commodities.
Meanwhile, there?s good news from Indian economy; the HSBC India Composite Index for July, which tracks both the manufacturing and service sectors ? posting 57.9, rising from 56.8 in June. This implies that the services sector is on something of a roll at 58.2 versus 56.1 in June ? the increase in fresh work accelerated moderately since June to a five-month high. Moreover, exports continues their run run with a 46% y-o-y growth in June; exports in the June quarter have now averaged 46% and even if the tempo slows, as it will, one could hope for a 20% increase for the year.
And although it?s a fact that corporate earnings are slowing dramatically, as economists tell you, this is not an economy where people lose their jobs easily. So even if GDP comes in at 7.6% estimated by Citigroup, the job market should not worsen; indeed skilled labour is in short supply in certain sectors and real wages remain strong.
A glance at the earnings for the June quarter so far show a surprisingly smart increase in the toplines of companies. Of course high interest rates will hurt consumption, after a lag but hopefully in the meantime fresh capacity will start getting created so that the capex cycle turns decisively. The short point is that economies like India are expected to weather the slowdown more easily.