I use three approaches to shape my world view and then combine them to get a much clearer picture of what likely lies ahead. My goal today is to share with you how I come up with a view of the Big Picture and to share my outlook for 2013. Words: 873
So says Zacks Investment Research in edited excerpts from an article* posted on Seeking Alpha under the title What Is The Big Picture In 2013?.
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The article goes on to say, in part:
Here are the three approaches to how I put my worldview together.
1. The GDP Growth Approach
This approach is the most generic one. You have seen this many times before:
- Overall global growth looks flat, with global GDP expected to be up +3.2% in 2013 and the +3.3% gain in 2012.
- The U.S. should muddle along, with the economy expected to grow by +1.9% in 2013 and +2.2% in 2012.
- The rest of the advanced world will be struggling. Japan’s new government wants to lift growth above the expected +0.8% pace in 2013 after the +1.8% growth in 2012. The Euro-zone’s deceleration appears to have flattened out with expectations for growth of +0.0% in 2013 after a -0.5% contraction in 2012.
- The bright spot remains the big emerging markets. China is expected to grow at +8.1% in 2013 after +7.7% in 2012. Growth in India’s economy is expected to improve +6.6% in 2013 from 2012’s +5.6% level.
2. The Foreign Exchange Approach
I find foreign exchange (FX) flows to be extremely insightful for equity investing. If FX flows are moving in your favor, they are most likely going to be there for your equity positions. The current consensus FX outlook for 2013 shows distinct stories playing out:
- Asia Pacific is the strongest region. The U.S. Dollar (USD) looks to depreciate against stronger growing Asia-Pacific and Latin American countries: India, China, Brazil, Mexico, and South Africa.
- The U.S. outperforms all other advanced countries. The USD looks to appreciate against developed countries: Euro, UK pound, Japan Yen, Aussie Dollar.
- Safe havens remain in play. There is USD parity with the Canadian Dollar. A fixed FX ceiling is maintained for the Swiss Franc.
- The Asia-Pacific countries compete fiercely for exports to a slower growing group of advanced economies. Appreciation is the likely trend in 2013 for the entire region except Japan and Australia. Currency appreciation and capital investment, in a more muted sense, can be seen for Latin American countries Chile, Mexico and Brazil too.
- Europe remains event-driven in 2013. While progress has been made on the core issues driving financial instability in the region, the growth outlook is dim. As a result, the Euro currency could be vulnerable to periods of volatility.
The takeaway is that the fast-growing developing world sees capital inflows and capital appreciation.
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3. The Regional Approach
Most discussions of the big picture tend to take place in a mindset of globalization. In other words, if the Euro-zone recession spreads to the U.S., the over-simple globalization discussion says all regions outside Europe feel the pain one-for-one. If China slows down, the globalization discussion says all regions outside of China feel pain one-for-one. Ditto for the U.S. growth influence on these two regions.
To regain some balance on the subject of ‘the world’, I decided to use Purchasing Power Parity Adjusted GDP numbers in dollar terms to get a fresh ‘Regional’ perspective. The following was dredged up from IMF statistics and is as close as apples-to-apples [comparison] as I think we can get:
- The GDP of the Asian region is about $26 trillion, with China alone at $13.5 trillion. Japan comes in at $4.7 trillion; India at $5.0 trillion.
- I put together a ‘U.S. region’ to include the U.K., Canada, and Mexico. The GDP of this ‘U.S. region’ comes in at $23 trillion, with U.S. itself at $17 trillion.
- The Euro Area and Central and Eastern Europe come in at $14 trillion, with Germany at $3.3 trillion.
- Latin America comes in at $7.6 trillion, with Brazil at $2.6 trillion.
This GDP data sets us up to better explore a second concept: regionalization….In Asia, China is 50% of the GDP, while the U.S. is close to 75% in the ‘U.S. sphere’. In Europe, Germany is 25% and Brazil contributes 34% of Latin America.
Asia: Asia is growing quite strongly, but leadership within the region is shifting from the previous leader, Japan, to the new leader, China. In Asia, as in any other region, regionalism intensifies interactions. The economics inside a region is always more decisive than in a global framework. Seen through the prism of regionalism, the Euro-zone crisis gets clearer too.
Europe: Germany has only 25% of the GDP strength — the lowest among world regions – so this region is inherently unstable. No surprise the Euro-zone currency crisis has been protracted. From this perspective, Latin America is also a lot like Europe.
North America: The U.S. is 75% of the story. Decisions and directions are much more coherent in this region.
The above means that regionalization can lead to far sharper insights on differences among world regions than globalization. Don’t oversimplify and assume Europe’s problems in 2013 will become the U.S problems – or that Europe’s problems will overturn the Asian story.
Three Conclusions are Better than One
- Asia will be a cornerstone for next year.
- The U.S. will be in better shape than any other advanced country.
- The struggle in Europe will be related to this region trying to keep up with the above two conclusions.
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Until policymakers see the light, it’s very slow and steady as she goes, with a chance of higher inflation on the horizon. This is not necessarily bad for the stock market, however, since I continue to believe that both stocks and bonds are priced to the expectation that growth will be very weak or even negative in the years to come. Words: 696