Rudi's View | Jun 17 2010
This story was mailed out to paying subscribers at FNArena on Tuesday, June 15, 2010.
By Rudi Filapek-Vandyck, Editor FNArena
London-based economists at Morgan Stanley were without the slightest doubt seeking to make a Big Statement on Monday when they sent out a research update to their clientele, titled "Just Say No To The Double Dip".
In the report, economists Joachim Fels, Manoj Pradhan and Spyros Andreopoulos predicted investors' angst about a potential return to the economic trough of early 2009 will prove misplaced.
If anything, argue the economists, global economic momentum in the months ahead is more likely to surprise to the upside. To add extra weight to their argument, the economists increased their global GDP growth estimate for this year by 0.4% to 4.8%, adding it would not come as a complete surprise if global growth this year ended up as high as 5%.
It goes without saying not everyone is as confident as Morgan Stanley. The RBA minutes for June, released on Tuesday, revealed RBA board members would like to be equally positive about the global economy, yet too much debt on the balance sheet of European governments is keeping financial markets on edge, with potentially negative consequences for the global economy later this year.
This is why the RBA, in the absence of a break-out in inflation, remains happy to sit on the sidelines while closely observing further developments.
Yet others dare to go a few steps further. Over the weekend, Glushkin Sheff strategist, and well-known market bear, David Rosenberg, participated in a meeting of experts organised by US investment magazine Barron's. To his own surprise, Rosenberg discovered his view about a likely double-dip recession in the US is now shared by other experts who had previously been positive about the US outlook.
My personal observation is that growth forecasts have been falling over the past weeks, in particular for the UK and for Europe, but also for China and for Australia. Most changes made were modest, but projections went down nevertheless.
It has been a similar story for corporate profits. In April I observed that profit growth projections for Australian listed companies had stopped rising as downgrades and upgrades were balancing each other out. Since then the underlying trend has turned slightly negative, without much drama, but slightly negative nevertheless.
Others have since reported a similar trend has emerged internationally.
Another reason why most investors are unlikely to take Morgan Stanley's confidence as gospel is because two leading forward looking indicators for the US economy are now firmly pointing towards a slowdown in the second half of the present calendar year.
The first one, a forward looking indicator developed by economic forecaster IHS Global Insights, has equally weakened since April, leading to a revised IHS forecast that US economic growth will hold up in the second quarter (April-June), but a slowdown will become apparent from Q3 onwards.
IHS is not forecasting any doom and gloom scenarios, but its prediction of a noticeable slowdown creates, by default, a gap with Morgan Stanley's revised expectations.
The story gets worse if we turn to the weekly updated forward looking indicator from the Economic Cycle Research Institute (ECRI). Broadly taken, this indicator has been on a sliding path since November last year and recently, economists at the Institute have started talking about a "significant slowing in U.S. economic growth in the coming months".
Similar to their peers at IHS, ECRI economists are not predicting a double-dip recession as yet, but there is no escaping the fact that the trend in their leading indicator is now firmly down.
It is this uncertainty that is at present hanging over global equity markets. Regardless of how confident economists at Morgan Stanley are in their prediction that everything will turn out just fine, the main question on investors' mind is: are economies slowing down? If so, how much will they slow down?
After all, it is the answer to this question that will determine whether equities are genuinely cheap at present price levels, or merely fair value, or worse.
Note, for example, that Yale professor Robert Schiller (half of the Case-Schiller house price index) believes US equities remain slightly overvalued, as opposed to significantly undervalued as calculated by most stockbrokers.
My best guess is that until we get a clearer picture on this matter, equity markets will remain a volatile battlefield between the bulls at Morgan Stanley and the bear at Glushkin Sheff.
This story was originally written and published on Tuesday, June 15, 2010.
