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Steady global growth continues, fueled largely by the United States

But economic uncertainty reigns supreme

The global economy is expected to continue gaining gradual momentum, boosted mainly by stronger growth in the U.S. economy and improving conditions in several battered emerging economies. The U.S. economy is already showing signs of further strengthening, buoyed by solid private consumption and a bounce-back in inventories. In the Emerging Market arena India and South Korea are showing economic vitality and the difficult economic conditions that some key markets such as Russia and China, experienced last year and in the first half of this year seem to be gradually abating. The Chinese economy appears to have stabilized as the resurgence of growth has been fueled by rising credit and a surge in government spending. However risks to the financial system as a result of the large and unregulated shadow banking system funding real estate excesses there remain ever present.

The U.S. economy continues to remain the outlier among advanced economies, with ongoing debate about when the next rate rise will be. Recently, all eyes were on the annual Jackson Hole conference, where Janet Yellen, head of the Federal Reserve, stated that the case for an increase in short-term interest rates has strengthened on the back of robust growth in the U.S. labor market. However conflicting messages are being sent by members of the Fed and unless inflation kicks up any rate increases are likely to be small and slow in coming. Interestingly when the last rate increase was announced in late 2015, markets yawned and essentially ignored it, which may signal a divergence between market forces and the putative power of the Fed.


The U.S. economy's strength is buoyed by solid private consumption and a bounce-back in inventories. Nonetheless, a persistently strong U.S. dollar and prospects of further weakening in much of the global economy will restrain growth in export-oriented industries, while low oil prices will continue to weigh on fixed investment. The upcoming Presidential election in November is likely to cause some turbulence in equity markets, although the outcome is unlikely to have much impact on the overall trajectory of modest growth because so much what happens is determined by the Congress and Senate. The bottom line is that the US is locked into a stable slow growth mode. Since we have now passed the pre-crash peak in almost all measures, it is a true expansion (no longer just a "recovery") which is now over 7 years old - the sixth longest since 1857 when records were first maintained and the fourth longest of the twelve cycles since WWII. The long anticipated acceleration (a return to the good old days) has disappointed the optimists. The stability has surprised the pessimists. The doom-and-gloomers are, as usual, dead wrong.

The consumer sector has clearly a key driving force behind growth, as households have begun dipping into a year's worth of accumulated savings from low gas prices and rising incomes. The rally in the stock market, along with steady growth in home prices, is pushing household wealth to record levels and helping keep confidence elevated. This "Wealth Effect" impacts spending and confidence. Most importantly, the labor market remains healthy, and the recent acceleration in wages should give households new support as the boost from lower energy prices fades.

Another source of strength for the economy has been the ongoing recovery in housing – which has a symbiotic relationship with the economy because it is both a barometer of, and a cause of growth. Over the last several years, home building has experienced significant growth, albeit off of low levels, and this expansion has added to overall GDP growth. In fact, since the last quarter of 2011, gains in home building have been responsible for 20% of the total economic expansion. Home buying generates a wave of additional spending, hiring, and investment not accounted for in the purchase price of the home alone.

The U.S. economy is a remarkably resilient engine of prosperity. Although this is the most sluggish economic recovery ever recorded, it is now over 7 years old and shows no signs of abating. America continues to be the engine pulling the world forward, driven primarily by the strengthening of the consumer and the return of selective manufacturing

The big news over the past few months and the cloud hanging over the global economy in the medium term is the dramatic Brexit vote and especially, the likely impact on Europe. While the Eurozone's economic recovery has continued and even gained momentum, the outlook is shaped by Brexit. Key among the questions now are how to structure the future relationship with the U.K. and how to manage the growing political risks. Three months have passed since the vote and, although the dust is gradually settling, the environment remains uncertain. Prices of equities and commodities declined sharply when the results of the vote emerged, before swiftly recovering as fears of imminent spillovers to the global economy receded. Following the vote, market expectations for a more accommodative monetary policy stance around the world increased, which, in turn, spurred risk appetite to rise even higher: Equities reached new record highs while commodity prices and especially oil have remained extremely volatile and unpredictable. Brexit's aftermath has confounded a lot of market expectations – almost none more so than sterling. In the first two days after Britain voted to leave the European Union, the pound plummeted by 11.8% against the dollar. But despite widespread bets that it would continue to tumble, sterling is still at around the same level it was three months ago and a number of major banks are backtracking on their initial bearish predictions. Interestingly, the stock markets in Germany and France dropped more than the U.K. did on the day after the referendum which confirms our belief that Europe will be far more affected than the UK.

Unemployment in the U.K. fell in the three months through August, a sign the British labor market held up well in the aftermath of the country's June 23 vote to leave the European Union. The Office for National Statistics said the number of people out of work in Britain declined by 39,000 May through July, pulling the unemployment rate down to 4.9%, the lowest level since the third quarter of 2005, and compared with 5% in the previous three months. The number of people in work rose to a record high of 31.8 million, the ONS said.

Most of the advanced economies have fared reasonably well, although the central banks are struggling with low inflation and low (even negative) interest rates.. Low commodity prices and high global savings rates have been a key factor of the current disinflationary situation in the advanced economies. In response to this, many central banks have reduced interest rates to ultra-low levels—even below zero in some cases—and further monetary policy easing is priced in by the markets, apart from for the U.S.


After a positive start to the year, growth in the Eurozone economy halved in the second quarter, largely as a shock-response to Brexit. However economic sentiment rose in August and the region's banks showed a relatively clean bill of health in the European Banking Authority's latest stress tests. Healthy domestic dynamics should support a steady expansion in the Eurozone economy this year, as low oil prices and supportive monetary policy provide a buffer for consumption.


Among developing economies, the economic outlook for Asia ex-Japan remained unchanged. Latin America's economic outlook also remained dismal for Brazil, and Venezuela continues to be a ticking bomb where a socialist government has ruined a once-great economy with theories of equality, free goods and sharing that attract votes but are disastrous in practice . In Eastern Europe, a less negative outlook for Russia is supporting growth prospects in the region, although spillovers from the Brexit vote are expected to hit some countries in Central Europe going forward. Lastly, the recent rebound in commodity prices following the Brexit vote has prompted the outlook for the Middle East and North Africa to stabilize. In contrast, the Sub-Saharan Africa region continues to be threatened by volatility in the financial markets and security concerns.

The long anticipated acceleration (a return to the good old days) has disappointed the optimists. The stability has surprised the pessimists. The doom-and-gloomers are, as usual, dead wrong.

In Japan weak wage growth and a strong yen limited growth in the second quarter, with GDP expanding at a paltry 0.2% quarter-on-quarter seasonally-adjusted annualized rate. Against this backdrop, the government unveiled a JPY 28.1 trillion (USD 269 billion) stimulus package in an attempt to jumpstart the economy. The plan mainly targets Japan's challenging demographics, infrastructure projects and reconstruction in earthquake-hit areas. While the program represents the largest fiscal stimulus since 2009, analysts warn that fresh spending only amounts to JPY 7.5 trillion. More recent data suggest that the strong yen is hurting the external sector as exports contracted at the fastest pace since 2009 in July. Japan's demographic problem is likely to be a damper on the economy indefinitely into the future, as more adult diapers than children's' diapers are sold there.

THE BOTTOM LINE: The path forward is fraught with uncertainty and the UK's vote to leave the EU has skewed the risks to the downside spurred by expectations of looser monetary policy around the world. Entering the latter part of the year, investors find themselves facing many familiar unknowns: whether the U.S. and global economies can maintain their muted pace of growth, the potential ramifications of a strong dollar, the impact of Brexit, the likely outcome of the US election and the extent to which monetary policy can influence the markets. The political landscape remains a source of apprehension, as investors seek to understand the implications of Brexit and more broadly, global populist sentiment. Yet investor appetite for risk assets has been on the upswing. In this environment, we believe:

· The global economy is gradually gaining momentum in the 3rd Quarter. The RVW Wealth Economic Team expects that barring a major cataclysmic event, the global economy will grow by 2.5% for all of 2016 and will pick up to 2.9% in 2017.

· Even as equities have rallied to new highs, downside risk management and careful stock selection remain important given the political crosscurrents and macro environment. Equities appear undervalued by most relevant yardsticks although the road upward is likely to be turbulent.

· More than ever, dynamic selectivity is paramount in these times of rapid change and evolution. The old strategy of accumulating "Blue Chip" holdings is no longer optimal because there are probably no longer "evergreen" stocks.

· Across asset classes, securities with higher quality attributes remain most attractive overall. Dividend paying stocks as a group will continue to provide the opportunity for income where virtually none exists elsewhere.

· The global and U.S. economies are not facing imminent recession, but fiscal policy decisions will be crucial in defining the way forward. It will be hard to break out of a tepid-growth environment without policies and regulations that encourage entrepreneurship and responsible risk taking.

· After years of aggressive monetary policy, central banks have limited room to maneuver effectively and emphasis will instead need to be placed on business formation and job creation. There are early signs that this is beginning to take place.


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