Ativo Capital

Rigorous Thinking

Financial and economic commentary reflecting Ativo’s world view:

The Outlook for Non-US Equity Markets, guest blog by William J. Cridland

Wednesday, September 8, 2010


The outlook for non-US equity markets overall remains favorable. However, performance will diverge by geographic region. In contrast to other recoveries from global economic downturns, the US is not leading the world out of recession this time around.

Western Europe’s equity markets clearly have been buffeted by concerns about the outlook for Greece and to a lesser extent Portugal and Spain. However, there are emerging signs of economic recovery on the part of Germany, Europe’s largest economy, and the UK, where a serious austerity program could be put in place. Overhanging the region’s outlook are concerns about the banking sector largely due to capital considerations as well as the exposure of the region’s banks to sovereign risk. Importantly, the impending Basel III capital regulations are likely to be phased in so as to avoid the need for massive near-term capital raises on the part of the banks. All-in-all, the recently implemented EEC bail-out plan for Greece has calmed the European bourses somewhat, but further bouts of worry still can be expected until more clarity about Greece’s fiscal future emerges.

Closer to home, the Canadian economy, having escaped the housing downturn taking place in the US and European markets, is experiencing fairly good growth in part fueled by commodity export demand. Domestic economic growth as well as the solid performance of that nation’s banking sector continues to buoy the Canadian stock market.

Latin America taken as a whole has become somewhat a growth engine led by Brazil, the “B” in “BRIC”, as well as the worldwide commodities boom presently taking place. With a growing middle class, Brazil is experiencing a rapidly rising level of domestic consumption expansion, which is being complemented by robust growth of its export sector. Looking ahead, the outcome of the upcoming presidential election there could have a significant impact on that country’s stock market. While some Latin American economies, such as Argentina and Venezuela, are suffering from meaningful self-inflicted challenges, others, such as Chile, are doing quite well. Interestingly, despite its well understood law enforcement problems and sharp fall off of cash payments from the US in recent years, the economic prospects for Mexico are reasonably positive, which augurs favorably for that country’s stock market.

The Asia-Pacific along with India region is expected to exhibit favorable overall stock market performance going forward. Australia is experiencing a commodity export boom and was one of the world’s first economies to raise short-term interest rates, in order to moderate inflation prospects. Southeast Asia on balance is in a growth cycle, which is boosting that area’s stock market performance. In sharp contrast, Japan has slipped to the world’s third largest economy, and its stock market is likely to continue to lag. The growth driver for the Asia-Pacific region as well as the world at large is, of course, China. China implemented a highly successful stimulus program last year. The shovels indeed were ready in China and the economy responded with a strong rate of expansion. This year with concerns arising over a possible housing bubble, the central government has put the brakes on the banks and has undertaken other actions to put a brake on the economy, which is moderating to a still reasonable rate of growth.

In closing, the current global recovery differs from its predecessors in that it is not being led by the so-called Western Economies. This is resulting in a marked divergence in the pace of economic recovery in the various regions of the world, which, of course, is impacting the outlook for equity markets. These differences in the pace of economic recovery are underscored by the fact that already several central banks have begun to tighten their monetary policy, which in turn is influencing currency movements. On balance, non-US equity markets should stay on a relatively positive footing.