09 November 2018, 13:06 GMT
Despite tentative signs of stabilisation, it is concerning how dependant any nascent positivity is on the recent surge in Asian exports data. We think without the positive ‘front-loading’ impact on Chinese exports, the FLI could look quite a bit uglier. But while we can speculate on how important this effect has been, we won’t truly know until the next few data points come out.
Source: Fidelity International, November 2018.
Unchanged cycle tracker
The FLI tracker has failed to break out of the bottom-left quadrant (growth below trend and decelerating over the past three months), where it has been for the past eight months. This suggests continued softness in global activity for the rest of 2018, with some of the underlying components looking fragile.
However with deceleration approaching zero, we could potentially see a stabilisation in global activity around the turn of 2019. The FLI ‘bet’ ticked down from last month, retaining a marginal overweight to risk and underweight to duration.
Potential for a sudden snap-back in trade indicators
Two of the five sub-sectors are out of the ‘bottom-left’ quadrant. The main positive is global trade, which shows outsized strength driven by surging Korean exports. Caution is advised here as we are wary of the potential for a sudden snap-back in trade indicators in the coming months; this could change how the FLI looks for the worse.
Impending US tariffs seem to have caused a ‘front-loading’ of activity in Asian supply chains, artificially boosting indicators in the near-term. October could well represent the peak here, given the 1 January deadline for shipping arrivals to avoid tariffs escalating to 25 per cent on $200 billion of Chinese exports to the US.
The consumer/labour sub-sector, in the top-left for a second month, also ticked up. This is still being driven by US data, though some European consumer confidence metrics improved at the margin.
The other three sub-sectors are stuck in the ‘bottom left’, indicating below-trend and decelerating growth. Industrial orders were the biggest disappointment, entirely erasing gains seen last month; only the US data looks robust, while Germany’s new foreign orders and Japan’s inventory-to-sales are very weak. On the other hand, business surveys have continued to improve at the margin, driven by less negativity in the beaten down EC bellwether surveys. Components related to commodities are the weakest.
Key headwinds yet to reverse
This may explains why the FLI is yet to ‘break out’ from the bottom-left quadrant, and is negative year-on-year for the first time since 2015. There are three primary headwinds. Firstly, global financial conditions have become tougher, led by the United States’ tightening monetary conditions and growth outperformance, which has put pressure on emerging markets in particular. This drag looks set to continue considering recent labour data among other indicators.
Secondly, the slowdown in China shows no sign of abating. The relatively minor ‘targeted easing’ measures seen so far appear to be having little effect.
Lastly, oil prices have become less of a drag in recent weeks but remain well above 2017 levels. Oil will continue to exert a lagged impact on activity for now.
Two key things to monitor are Chinese ‘easing’ (or lack thereof) and any slowdown in Asian trade data after the tariff-related ‘pull-forward’ drops out. President Trump’s much-touted meeting with President Xi Jinping at the G20 might provide some boost to sentiment, but this doesn’t change the more fundamental headwinds above.
That said, these fundamental headwinds are increasingly mature and arguably now fairly well-digested by markets. This is perhaps reflected in the FLI’s stabilisation. The FLI ‘bet’ remains essentially neutral, giving a small positive reading for risk assets, but this is even smaller than last month.
At present, the FLI suggests slowing global growth to the end of the year, before a possible stabilisation or maybe even a positive inflection around the turn of 2019, barring a major external shock. All told, the overall picture suggests caution, with the FLI still negative year-on-year and very vulnerable to rolling over in global trade data in the coming months.
The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future results.
These materials are provided for information purposes only and are intended only for the person or entity to which it is sent.
These materials do not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities or investment product.
Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. They are valid only as of the date indicated and are subject to change without notice.
This material was created by Fidelity International. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
This content may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organisation that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice personal recommendations based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG, authorised and supervised by the Swiss Financial Market Supervisory Authority FINMA. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German institutional clients issued by FIL Investments International – Niederlassung Frankfurt.
In Hong Kong, this content is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road, Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C. Customer Service Number: 0800-00-9911#2.
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.