“This is a particularly serious deceleration in industrial production.”
Woods says disruption in the US, European and Japanese automotive sectors weighed on global industrial production, as did some weather events.
But the trade tensions between China and the US have also had a big impact in recent months.
The US Federal Reserve, he argues, was right to hold fire and take a view more in line with that of the market.
But Woods believes it is a genuine pause, and the Fed will hike once more in the back half of the calendar year – probably the fourth quarter – as the global economy gets back on track.
“The slowdown is becoming pretty apparent but we feel we are at the bottom of it.”
Woods can’t see a near-term trigger for a recession, outside of a dramatic escalation in trade tensions, or a dramatic weakening of the US labour market; he says last week’s payroll figures were “too bad to be true” and expects big upwards revisions next month.
But the inversion of the US Treasury yield curve, which occurred late last year with two-year and five-year notes, and is getting closer with the more carefully watched spread between two- and 10-year notes, remains a concern.
Woods says there was a 19-month gap between inversion and recession in the 1980s, a gap of 34 months in the 1990s and a two-year gap between inversion and the global financial crisis.
“It may well be in the next to two to three years that we hit recession … but we just don’t know when.”
Right now, he says central banks around the world – particularly the Fed, the European Central Bank and even the Bank of Japan – appear to be moving in concert to provide accommodative conditions.
“Central banks can extend this growth cycle through co-ordinated easing.”
Woods says the best way to play late-cycle markets is through an income approach, and Credit Suisse is favouring dividend-focused sectors such as energy, healthcare and materials.
Investment grade and high yield debt is also a key recommendation.
But he’s also bullish on emerging markets, arguing that the weakness in the US dollar has added support to a story of improving growth outlooks and attractive valuations.
“Over the last two or three months, US dollar weakness has been accompanied very much by strength in Asian equity markets,” Woods says.
Right now, cash is pouring in to domestically focused Asian markets – China A shares are a good example, with five times as much money flowing into that market as in 2018, when share prices tanked.
But as industrial production improves, Credit Suisse will turn its attention to more export-focused share markets, such as Korea and Taiwan.
James Thomson
from Credence news https://ift.tt/2SYKc06
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