Dealing With Divergence: The Outlook For 2015 (Part 3 of 7)
Entering the age of divergence
Now we are entering what we at BlackRock are calling the Age of Divergence: The U.S. (IVV), U.K. (EWU) and select emerging markets are getting stronger while other regions—including much of Europe—are still struggling. The result is that central banks are beginning to take different paths, with the Fed setting a course for higher interest rates and the European Central Bank and Bank of Japan doing the opposite.
Market Realist – The theme for 2015 will likely be the Age of Divergence. Many parts of the world are suffering from an economic slowdown. Japan (EWJ) is officially in a recession. It had negative gross domestic product, or GDP, growth rates of -1.5% and -0.9% in the past two quarters. This can be seen in the previous graph. Factory output slowed to 0.6%. In November, inflation in the economy fell to a 14-month low. The core consumer price index, or CPI, excludes the effects of the sales tax hike. It was implemented in April 2014. The core CPI declined from 0.9% to 0.7%. This was below the central bank’s target of 2%.
Market Realist – The Eurozone (EZU) also stands on the brink of a recession. Throughout the year, it had GDP growth rates near zero. This can be seen in the previous graph. Most of the countries in Europe are facing deflationary threats.
Market Realist – China hit a stumbling block. The Chinese economy is plagued with concerns about a manufacturing slowdown. The GDP growth rate for 3Q14 came in at 7.3%—the lowest in five years. You can see this in the previous graph.
Market Realist – For December, China’s (FXI) manufacturing PMI (purchasing managers’ index) was 50.1. It was 50.3 in November. Although an index estimate above 50 indicates expansion, the pace of growth declined in recent months. Now, it’s almost negligible. The subindex that measures production fell from 52.5 to 52.2 in December. This indicates weak domestic demand. A summary of China’s PMI can be seen in the previous graph.
Market Realist – The soft growth in Japan, China, and the Eurozone forced the central banks to roll out stimulus measures—even as the US (SPY) prepares to hike rates.
The Bank of Japan, or B0J, rolled out a stimulus package in October. The stimulus package involved increasing the asset purchases from the previous range of 60–70 trillion yen to 80 trillion yen annually. Last week, the Japanese government approved stimulus spending of 3.5 trillion yen. This is ~$29.12 billion. The government said that the stimulus would bolster the GDP by almost 0.7%.