Supporting Demand

 

This was an excerpt from Cabot Emerging Markets Investor, which seeks to capitalize on the enormous potential in emerging market countries. Chief analyst Paul Goodwin, Cabot’s international investing guru, provides your passport to profits.

The International Monetary Fund just cut its estimate of global growth; it’s now forecasting growth of just 3.1% in 2015. Earlier in the year, the IMF pegged its growth forecasts at 3.7%, but that number has been shaved a couple of times.

In effect, GDP growth is the most valuable commodity in the world right now, and most countries are working to make it happen. And the preferred method for growing GDP is stimulating consumption.

Last week, the Central Bank of India executed a surprisingly large half-percent cut in interest rates that’s intended to increase domestic spending. Indian manufacturing has slowed down and exports are off, and the government hasn’t been able to make up the difference in economic activity with infrastructure projects.

Chinese regulators have also been busy, cutting the mortgage down payment requirements for first homes from 30% to 25%. Sales tax rates on smaller cars have also been cut in half.

And even the U.S. Federal Reserve Board’s decision to delay its rate hike until later in the year can be taken as a measure to increase consumption.

There is a series of effects that follows when consumers tighten their purse strings, and it’s easy to trace. Lower demand is felt first by retailers, who see less money in the cash register at the end of the day. Lower sales at retailers is a signal for distributors to lower their wholesale orders, which causes factories to reduce manufacturing (and lay off workers), order fewer raw materials and reduce use of shipping and delivery services.

Or, to be more specific, lowered demand for goods in the U.S. (and elsewhere) hits U.S. retailers, U.S. and Chinese manufacturers (and workers), commodity producers like Brazil and miners in Australia. It even works to keep the price of oil low, which puts a brick on the head of all producing countries and suppresses exploration and production in the U.S. In other words,  the general slowdown in global growth sends ripples through the economies of every country.

The global economy has weathered isolated slowdowns in recent years. When the situation in Greece put pressure on European economic activity, the healthy Chinese economy acted as the engine of global growth. And when China began to slow down, consumers in the U.S. stepped up.

But the global economy hasn’t been able to get the virtuous circle of coordinated growth going. That’s when consumption is high enough to start the upward spiral of production, job growth and (ultimately) higher wages, etc.

The really interesting phenomenon right now is that there are signs of increased investor interest in many beaten-down stocks. The S&P 500 is within shouting distance of its mid-September highs and both emerging market stocks (symbol EEM) and Chinese ADRS (PGJ) have hopped higher. (And all the while, the Shanghai Exchange remains flat as a freeway frog.)

We know that stock markets, which aggregate and discount the sentiments, calculations, hopes, fears and greed of all investors, are always looking ahead by at least six months. So this recent twitch higher may indicate a collective bet that things will be better for the global economy by the time spring rolls around in 2016.

As always, we’ll watch closely and do exactly what the market tells us to.

A researcher and writer for over 30 years, Paul Goodwin has been a member of the Cabot investment team and chief analyst of Cabot Emerging Markets Investor since 2005.

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