MarketMinder Europe 

MarketMinder Europe

MarketMinder Europe provides our perspective on current issues in financial markets, investing and economics. Our goal is to analyse key topics in an entertaining and easy to understand manner, helping you see the news of the day in a unique perspective.

Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

Checking In on the Global Minimum Tax

Editors’ note: Given tax policies touch politics, please keep in mind MarketMinder Europe is politically agnostic and never for or against any particular policy. We assess developments solely for their potential market impact—or lack thereof.

Earlier this month, preparing for a planned 2024 rollout, the Organisation for Economic Cooperation and Development (OECD) issued final guidance on how governments should enact a 15% minimum tax on large companies that 137 countries agreed on in October 2021.[i] This may sound like the much-vaunted Global Minimum Corporation Tax is gathering pace and implementation is at hand. But that impression doesn’t match reality, in our view, and a look at the long and uneven process shows why tax overhauls—even those billed as major once-in-a-generation shifts like this—generally have way less market impact than most think, as we will show with data.

When last we left it almost a year ago, the EU had run into a roadblock, as several low-tax member nations objected to the plan—wanting to see US action before signing on. After a mid-December breakthrough, though, Poland and Hungary dropped their objections and all 27 EU members ostensibly greenlit the proposal.[ii] Now, the OECD is taking the next steps by issuing detailed instructions for incorporating it into governments’ tax codes.[iii]

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The Index Updates Coming This March

MarketMinder Europe doesn’t make individual security recommendations. Specific companies mentioned here serve only to highlight a broader theme.

Last year, investment index providers S&P Dow Jones Indices and MSCI announced some changes to the Global Industry Classification Standard (GICS) structure, which is one of the most widely used methods of categorising stocks in terms of economic sector and industry, in our experience. With those updates taking effect this March, here is a look at what is getting recategorised—along with some titbits to keep in mind.

S&P and MSCI developed the 10-sector GICS system in 1999 to showcase certain economic sectors’ returns—especially then-white-hot Tech.[i] The index providers review it annually and consult with market participants on potential changes to keep pace with the market’s fluidity, emergent economic sectors and industries, and individual companies’ evolution. In doing so, the GICS system aims to give a clearer view of the economy, though it isn’t always a perfect delineation, in our view, since companies may fall into some gray areas or overlap sectors. For example, GICS classifies a couple of big US Internet retailers under Consumer Discretionary—though we can see a case for them as Information Technology firms.[ii] Our research shows there are also Tech firms that make the vast majority of revenue on consumer products and services.[iii] Oh, and there is the little matter of the Energy sector containing no pure renewable energy companies.[iv]

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Eurozone GDP: Slight Growth Tops Worst-Case Projections

Here is something we have noticed about stocks: Based on our observations of their behaviour, they don’t need things to be perfect. Or great. Or even necessarily good. Sometimes, in our experience, if investor expectations are low enough, anything that isn’t a disaster does the trick. We think this has been a major stock market theme lately, with the MSCI World Index delivering a very fine January despite an onslaught of mixed economic data—and with the eurozone outperforming despite some headline results that, in a vacuum, we would describe as not awful, but not very good.[i] The latest example? Q4 eurozone gross domestic product (GDP, a government-produced measure of economic output), which slowed as two of the four largest economies contracted a bit.[ii]

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America’s Economy Grew in Q4

US gross domestic product (GDP, a government-produced measure of economic output) rose an inflation-adjusted 2.9% annualised in Q4, decelerating slightly from Q3’s 3.2% but topping analysts’ consensus estimate for 2.3%.[i] (Annualised growth rates represent the rate at which GDP would grow over a full year if the quarter-on-quarter percent change repeated all four quarters.) Whilst this suggests to us recession (a broad decline in economic activity) didn’t start in Q4, under the bonnet, we think the data here extend the trend of mixed figures that we observed for much of last year—seemingly allowing many commentators we follow to see whatever they want in the results. For investors, we caution against the potential tendency to extrapolate backward-looking figures.

Start with US GDP’s big private sector components: consumer spending and business investment.[ii] Personal consumption expenditures (PCE), 71% of GDP, rose 2.1% annualised, contributing about half of headline growth.[iii] This slowed from 2.3% the previous quarter, which some commentators we follow suggest indicates trouble lies ahead.[iv] Perhaps. But with inflation (economy-wide price increases) slowing, we would be careful about drawing such conclusions.[v] Trend-wise, PCE growth was led by broad-based services spending—the lion’s share of PCE—with all categories seeing gains last quarter.[vi] Most goods categories also contributed, including motor vehicles and food away from home, which were notable detractors in prior quarters.[vii]

Business investment rose 0.7%, but it was more mixed below the surface.[viii] Intellectual property development (think software, research, media and entertainment) rose 5.3% annualised, continuing a long string of gains.[ix] Structures (commercial and industrial building) also saw slight 0.4% annualised growth after six straight quarterly declines.[x] However, equipment—mainly in information processing—fell -3.7% annualised.[xi] From our observations, though, this series has been quite volatile over the last year and a half amidst supply chain disruptions. However, transportation equipment has now grown three quarters in a row, suggesting to us bottlenecks are easing for that equipment category.[xii]

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The Latest Confirmation of a Tough 2022

Output gauges haven’t yet caught up to the fresh, preliminary 2023 purchasing managers’ indexes we detailed on Wednesday—both in terms of timing and the data themselves, which weren’t rosy. However, the latest output data’s findings provide insight on certain parts of the global economy—which we think can reduce uncertainty. Moreover, based on our coverage, there are some little-noticed signs of improvement, too, suggesting a lot of room for positive surprise that can be the foundation of a stock market rebound, in our view.

Japan’s Weak Core Machinery Orders

Japanese core machinery orders, which many observers we follow treat as a sign of future corporate investment, fell -8.3% m/m in November, much worse than consensus estimates of -0.9%.[i] (Core machinery orders are for capital goods excluding ship and electric utility firms.) We think that is a noteworthy drop for a series that is seasonally adjusted (adapted to remove skew from holidays, weather and other recurring events), although our research has found this metric tends to be more variable than others. Weakness was broad: Manufacturers’ orders fell -9.3% m/m due to a slump in semiconductor production equipment whilst non-manufacturers’ orders slipped -3.0% on tepid demand from the information service sector.[ii]

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Your First 2023 Economic Check-In

January isn’t over yet, but thanks to the fine folks at S&P Global, we have our first inkling of how the global economy started 2023. Yes, flash purchasing managers’ indexes (PMIs, monthly surveys that track the breadth of economic activity) for January are out, and we think there are some hints of good news—further suggesting 2023’s economic landscape has a good chance of shaping up better than the dismal projections we have seen from financial commentators we follow. Big negative economic surprise that hits stocks hard remains unlikely, in our view.

The Eurozone Expands a Bit

Most noteworthy, in our view, was the eurozone’s composite PMI, which combines manufacturing and services output, rising to 50.2.[i] PMI readings over 50 imply expansion, so this suggests output rose a smidge for the first time since June.[ii] Manufacturing stayed in contraction at 48.8, but services flipped to growth at 50.7.[iii] Now, the two individual countries reporting thus far seemingly told opposite stories. Germany and France’s composite readings both stayed in contraction at 49.0 and 49.7, respectively—but German services grew whilst French services contracted, whilst Germany’s manufacturing PMI contracted and France’s grew.[iv]

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The 2023 Recovery We Anticipate

What next? After last year’s parallel stock and bond market routs, we find that question is on many investors’ minds.[i] In the very short term, anything is possible—near-term volatility is unpredictable, in our view. But we think stocks and bonds are primed to rebound this year as uncertainty fades and last year’s alarms prove to have overshot the emerging reality. How so? Read on.

Bear markets (typically prolonged, fundamentally driven declines exceeding -20%) are painful to endure, in our experience, and 2022 was no exception for US and world stocks in dollars. Whilst UK stocks and global returns in Sterling never reached bear market territory tied to currency swings, given that world stocks experienced a bear market last year, we think that distinction is important.[ii] Late in bear markets, we find patience is usually rewarded, as our research shows recoveries begin with typically sharp V-shaped jumps. In our view, that likely occurs this year, which we think UK investors are likely to experience regardless of the downturn’s nature in Sterling. It may have already begun—since 12 October, the MSCI World Index is up 15.5% in dollars, even with December’s back-and-forth and last week’s slide.[iii] In pounds, world stocks are also up 9.5% from their 16 June low.[iv] Or maybe more downside lurks, from a new negative or investors’ working out some last spurt of angst. Recession (broad economic contraction) chatter amongst many commentators we follow certainly appears to be hitting sentiment hard now. Yet even if there is a recession, we don’t think it is likely to sway stocks materially. Markets—and CEOs—largely think a downturn is likely, based on available surveys and data.[v] Stocks ordinarily bottom before growth returns, according to our hisorical analysis. In all of these scenarios, whilst the timing is impossible to pinpoint, we think the conditions are ripe for a new bull market to get cooking in 2023, as stocks’ three main drivers—politics, economics and sentiment—point positively.

Politically, the US presidential cycle’s third year supports better-than-average returns, in our view. Now, as always, MarketMinder Europe is nonpartisan, favouring no party nor any politician, with our analysis assessing political developments’ potential market effects only. So what matters to us isn’t the personalities or partisan particulars, but the fact that US midterm legislative elections brought a split Congress, with Republicans winning the House of Representatives and Democrats maintaining Senate control, ensuring political gridlock for the next two years. This ushers in what we call the Midterm Miracle for stocks. Our review of electoral history shows midterms often deepen gridlock, reducing the risk government enacts anything radical to upset markets, and that typical backdrop reigns now.

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Digging Into US Services Industry Data

In recent months, a curiosity has emerged in US economic data—a split between the two competing purchasing managers’ indexes (PMIs, surveys of growth’s breadth) for the services sector.[i] Whilst the Institute for Supply Management’s (ISM’s) readings remained in expansion, S&P Global’s started contracting in July and stayed there, below the 50 mark indicating more firms contracted than grew, the rest of the year. But now the divergence is no more, as ISM reported Friday that its services gauge also slipped into contraction in December. Barely, at 49.6, but down nonetheless.[ii] Given the ISM Services PMI’s relatively lower monthly variability and tendency to contract only when recession strikes, this development got plenty of attention from financial commentators we follow.[iii] However, we don’t think it revealed anything new for stocks.

Exhibit 1 shows the growing split between ISM and S&P’s Services PMIs last year. As you will see, even before they diverged directionally, S&P’s was usually a few points below ISM’s.

Exhibit 1: A Tale of Two Services PMIs

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More Evidence We Think a Recession Wouldn't Shock Now

On the heels of December’s dim manufacturing purchasing managers’ indexes (PMIs), services and composite PMIs showed contraction in many of the world’s major economies.[i] (PMIs are monthly surveys that track the breadth of economic activity as companies report a yes or a no to their company growing or contracting. Readings above 50 indicate expansion, whilst below 50 indicates contraction.) Perhaps services’ contraction is less broad-based than manufacturing, given their readings are closer to 50.[ii] Yet most are still below, suggesting contraction. That said, as we wrote last week, we think what likely matters to stocks looking forward isn’t whether economies shrink, but whether any recession (a decline in broad economic output) is a surprise or surprisingly nasty. A quick tour of the latest surveys of economists, CEOs and fund managers shows recession is a popular forecast this year, suggesting negative surprise power is quite limited.

Take survey results in the US for example. The US Federal Reserve Bank of Philadelphia’s (Philly Fed’s) quarterly survey of professional forecasters tracks a few dozen economists’ gross domestic product (GDP, a government-produced measure of economic output) growth projections for the US for the next several quarters. From their forecasts, the Philly Fed calculates the mean probability of US GDP growing (or contracting) at a given rate. In Q4, economists put the mean probability of a US recession occurring within the next 12 months at 43.5%. That is the highest estimated probability in the series’ history, which begins in 1968.

Exhibit 1: Philly Fed Survey of Professional Forecasters

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A Look Around the World at Manufacturing Surveys Entering 2023

The New Year is officially underway, but 2022 still lingers on in a sense, as December’s economic data are only just starting to come out. First up: The business surveys known as Manufacturing Purchasing Managers’ Indexes (PMIs), which showed factories worldwide finished the year on a poor note—which didn’t surprise economists, based on the consensus expectations compiled by FactSet.[i] Manufacturing’s troubles have been well-documented throughout financial commentary we follow, but our research suggests heavy industry is uniquely vulnerable to last year’s biggest headwinds. The potential silver lining? With those headwinds widely known and now, in our view, starting to fade, we think global markets could be poised to begin pricing in an economic recovery much sooner than commentators we follow have stated is likely.

Exhibit 1 rounds up the major manufacturing PMIs. As you will see, all remained under 50—the dividing line suggesting more respondents reported contraction than growth. That extends the trend that materialised around midyear.

Exhibit 1: Around the World in Manufacturing PMIs

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Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

This article reflects the opinions, viewpoints and commentary of Fisher Investments MarketMinder editorial staff, which is subject to change at any time without notice. Market Information is provided for illustrative and informational purposes only. Nothing in this article constitutes investment advice or any recommendation to buy or sell any particular security or that a particular transaction or investment strategy is suitable for any specific person.

Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.