International Equity Commentary: June 2014

Equities Gain on the Back of Improved Outlook for the Second Half of 2014

International equity prices advanced further in June on expectations that the major developed economies are likely to see healthier trends during the second half of this year. Japan and Canada saw robust gains during the month while markets in Europe underperformed. The Canadian economy is expected to benefit from higher oil prices and the potential revival in global demand for industrial commodities. Growth in the Euro-zone for the current year is likely to fall short of earlier forecasts, as industrial growth has moderated and inflation remains low. In contrast, the U.K. economy continues to expand at a healthy pace, though exports were lower than expected in May. In Japan, consumer spending slipped as expected after April’s tax increase, but consumer sentiment has improved subsequently.

Emerging markets outperformed during the month, helped by strong gains in Brazil, Russia, Thailand, and Taiwan. China and India added to their earlier gains on expectations that economic growth is unlikely to slip further in these countries. Exports from China expanded in May and June, reversing the weak trend seen earlier this year, indicating a revival in global demand. Other Asian countries such as Korea and Taiwan also saw moderate export gains in June, and helped market optimism about the economic outlook.

Global manufacturing output growth accelerated in June as the U.S., the U.K. and most major Asian countries reported gains. Factory output in Japan rebounded in June while the Euro-zone saw moderation. New order flows were healthier for the major countries in June, which suggests further output gains in the coming months. Global services activity also expanded at a faster pace in June, helped by the revival in China and India.

Near-Term Outlook

The Euro-zone continues to see subdued trends, as the economies of France and Italy remain weak. Industrial output in both countries have seen marginal declines recently, dragging down the output growth for the region in June. Exports for the month of May were more subdued than expected as the stronger euro has eroded competitiveness. Germany remains the main driver of the region’s economy, and any slowdown there could further weaken the region’s outlook. Nevertheless, the ECB’s recent policy decisions could help improve credit availability across the region and potentially lift consumer demand. In addition, governments that are in better fiscal health such as Germany could step up spending on infrastructure to support the economy. As inflation remains way below target, the ECB could also consider expanding its monetary support during the second half.

The Japanese government has announced the much anticipated ‘third arrow’ of structural reforms that are intended to improve the country’s long-term competitiveness. Major proposals include a gradual reduction in corporate taxes and lowering of the government’s fiscal deficit. The Japanese government is also setting up special industrial zones with lighter regulations to encourage companies to build domestic capacity. Japanese consumer and small business sentiment have improved, and indicate that the economy has weathered the consumption tax hikes in April. However, the sharp drop in capital goods orders for May and the subdued export data remain worrisome.

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