A global financial forecast
By Robin Loving Rowland
Registered investment advisor J. Michael Gallagher will present a global financial forecast to the Rotary Club at Hotel Real de Minas Tuesday, November 5, at 12:30pm. This is a view into this extremely accomplished investment advisor’s crystal ball.
A Global Financial Forecast
Tue, Nov 5, 12:30pm
Hotel Real de Minas
Stirling Dickinson at the Ancha de San Antonio
During the first half of 2013, all US stock market averages rose about 14 percent. Smaller market capitalizations out-performed larger market capitalizations. Meanwhile, European stocks rose only two percent, Indian stocks were virtually flat, and Chinese stocks were down 12 percent. Of the major markets, only Japan outperformed the US, rising 32 percent, a reflection of their government’s attempt to revive their economy.
The US economy rose 1.8 percent in the first quarter, and a similar amount in the second. Expectations are for a slight pickup through the second half of this year and into 2014. US growth continues to be benefited by low interest rates and rising asset prices, but hindered by increased regulatory costs and uncertainties caused in great part by the vagaries of unwritten DC regulations.
Low interest rates have been particularly helpful to the housing and auto sectors, and rising stock and real estate prices have brought household net worth back to its 2007 peak.
Strong growth in energy production has led to lower natural gas prices, which is benefiting the industry in general and the chemical industry in particular. In 2012, oil production in the US rose 14 percent to 8.9 million barrels a day, which compares to Saudi Arabian production, 11.5 million barrels per day, and Russian production, 10.6 million barrels per day.
US consumer confidence has risen, but job growth is slow, and small wage gains have resulted in tepid consumer spending growth. The most recent three job reports suggest some improvement in the forecast, but state and local governments and many service industries have been reducing employees’ hours to fewer than 30 per week to lessen the cost of ‘Obama Care.’ Year to date, only130,000 full-time jobs have been created, in comparison to 557,0000 part-time jobs.
Business is hoarding more than a US$1 trillion in cash, having little incentive to invest in a slow-growing economy with significant regulatory uncertainty. This is particularly true in small business, where the majority of jobs are created.
International trade has depressed economic growth. Because the US is one of the strongest global economies, our imports are relatively strong. With relative US economic strength, the dollar has risen against most currencies, hurting US exports.
Government expenditures have slowed because of the sequestration. As the impact of this lessens, rising tax revenues will enable federal, state, and local governments to increase expenditures.
Growth in federal tax revenues has reduced the federal deficit to the $600 billion mark, or in the range of four percent of gross domestic product, a vast improvement over a few years ago.
Over the next five years, China and India are expected to provide nearly one half of total global economic growth. India’s growth is occurring in spite of a dysfunctional and corrupt government. It is hoped that elections held next year will result in a government more focused on growing the economy, which currently has a 250 million-person middle class. Meanwhile, the 25 percent decline in the rupee versus the dollar since 2011 will help India’s exports.
China is trying to transition from infrastructure-led growth to consumer-led growth. At the same time, the new government is trying to slow credit growth. Because the government will not let citizens invest outside of China, and it holds yields on savings at very low rates, people with money to invest have turned more to shadow banks that create investments with higher potential returns.
This has resulted in the huge rise of overall credit to gross domestic product from 120 percent to early 200 percent over the past five years. Getting control over this runaway credit expansion will probably cause growth to slow to around six percent for the next few years. The Chinese government has openly suggested that six point five percent could be possible in 2014.
Japan’s growth should pick up because of its recent massive monetary stimulus. The major question is whether reforms to make Japanese manufacturers more competitive can be implemented. The government is already talking of protecting domestic producers of rice, meat, sugar and fishing. It will be hard not to protect other vested interests with this precedence.
Western Europe’s economies, while slowly improving, remain in recession. Structural changes are being made, but the outlook remains one of slow growth for the next few years.
In summary, the US economy will attract investment capital from most of the rest of the world, further strengthening the dollar, helping keep inflation low, aiding growth in real wages in the US.
“I expect the US Federal Reserve to adopt a more neutral monetary policy gradually to allow the vast global monetary stimulus to begin to abate,” said Gallagher. “I expect short-term interest rates to remain near zero percent well into 2015 while longer-term bond rates move higher,” he continued. “Total returns on bonds will no longer be superior to stocks, and could be focused on identifying small and mid-cap stocks (under US$15 billion), which are benefiting from the strength in housing, autos, energy and finance, and which avoid many of the European and emerging market problems,” he concluded.
J. Michael Gallagher received a BS from the University of Notre Dame and an MS from Columbia University before entering the investment management profession as a security analyst. He became an account executive and trained in research before registering with the SEC to sell securities.
Gallagher joined the Bank of America Trust Department as a security analyst, becoming vice president responsible for more than US$1 billion under management. He then became a chartered financial analyst and was responsible for covering utility stocks and the oil industry.
Gallagher later transferred to portfolio management to handle high net worth clients. He rose in portfolio management to become responsible for half of the trust department’s investment management group, overseeing a staff of 25.
Gallagher then became a chartered investment counselor and worked as an analyst and portfolio manager. During his tenure, assets rose from US$250 million to US$6.5 billion, and he became the firm’s fourth largest shareholder.
In 2013, he joined Dorsey Capital Management as a registered investment advisor. He may be reached at firstname.lastname@example.org.
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