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Slower Growth Has a Silver Lining!


Dec. 4 2020, Updated 10:52 a.m. ET

However, slower growth has a silver lining: the potential for greater monetary and fiscal stimulus.

Investors in China, for instance, are hoping slower growth will lead to stimulus by the government. Investors are being similarly consoled in Europe, where, European Central Bank President Mario Draghi just reiterated his commitment to Europe’s quantitative easing program. Even in the United States, the weak pace of global growth has reassured investors that a potential interest rate hike by the Federal Reserve isn’t a near-term threat.

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Market Realist – Growth is slowing in both developed (EFA) and emerging markets (EEM). The graph above shows the manufacturing purchasing managers’ index for China (FXI) as estimated by HSBC/Markit. The flash PMI estimate for April came in at 49.2, the lowest in a year. PMI estimates below 50 indicate contraction.

Market Realist – China’s (GXC) GDP grew by 7.4% in 2014—the slowest rate in almost 24 years. The growth last quarter came in at 7%, the slowest in almost six years. Fixed asset investment grew by 13.5% up to March, its slowest pace in 14 years.

The weakness in Chinese (MCHI) economic data has raised expectations for further stimulus from the People’s Bank of China, China’s central bank. The central bank has introduced two interest rate cuts since November and has eased housing regulations to aid growth. It also reduced the proportion of deposits that lenders set off as reserves to 18.5% from a previous 19.5%.

Stimulus bets have helped Chinese equities rise to seven-year highs. The iShares China Large-Cap ETF (FXI) is showing an impressive year-to-date total net asset value return of 24.7%.

Market Realist – The European Central Bank (or ECB) announced 1.1 trillion euro stimulus in January and launched its bond buying program on March 9, 2015. This stimulus aims at pushing up the Eurozone’s (EZU)(VGK) near-zero GDP growth rate and fending off deflation. This stimulus acts as a tailwind for European equities. The iShares MSCI EMU ETF (EZU) has posted year-to-date returns of 6.2%—much higher than US equities’ returns (IVV).


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