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Michael Savy Blog post by Michael Savy

2016 Global Economy & Equity Outlook (Part 1) | United States Economy

Here are the other parts of the 2016 Global Economy & Equity Outlook:

Part 1: United States Economy
Part 2: Asian and European Economy
Part 3: Commodities Market
Part 4: Australian Economy


Ben Kingsley: So here we are for another year. I’m with my business partner Michael Savy who’s our chief investment officer. He heads up our financial planning team and we’re looking at two big things in the 2016 outlook. The first one is the global economy in terms of what’s happening there and then we’re going to relate that to the equity market. So thanks for joining us Michael.

Michael Savy: Not a problem Ben.

Ben Kingsley: So let’s start with the US, the biggest economy in the world. How do you read the US economy at the moment?

Michael Savy: Look, the US economy is flying along while some would be questioning that but I think that the US is actually flying along OK at the moment. A lot of their data points seem to be holding. Obviously their employment numbers have started to come down and has been over the last few years and one of the key things with the US is or the concern is around the – increasing their wages.

Ben Kingsley: Yeah.

Michael Savy: So that’s something that we are keeping an eye on. Inflation is pretty subdued both in the US and globally. So it gives them a little bit of room. I think last year there was a bit of emphasis and focus on the – when the Fed would actually move rates which is that they did late last year.

Ben Kingsley: Yeah.

Michael Savy: This year the expectation at the time was there would be a couple of rate rises. But given what’s going on in the last few weeks, month or so, that’s …

Ben Kingsley: There was talk around the March and now they’re sort of thinking maybe midyear.

Michael Savy: From the communications, they’re still not just open but given they were quite reluctant to increase rates late last year given the volatility and that volatilities continued on.

Ben Kingsley: Yeah.

Michael Savy: I would think that they would be conscious of being wary of that. So we were expecting two to three. We may actually get maybe just one or two later in the year once things settle down a little bit.

Ben Kingsley: OK. So you were talking about potential wage growth. Tell us what the risk of that is. Is it inflationary?

Michael Savy: Yeah. Look, wage growth is obviously in the services industry or services country. Wage is a key input factor of production. So as that grows, one of the good things so far is that the US unemployment GFC time has come from 10 percent down to 5 percent and tracking probably a little bit lower. So it’s at the natural employment rate.

Ben Kingsley: Yeah.

Michael Savy: But on the flipside we haven’t necessarily seen an increase in wages that you would normally see with that type of reduction in unemployment.

Ben Kingsley: Yeah.

Michael Savy: So there has been a little bit of concern and I would love to see that come up because obviously high pay packets, high spending.

Ben Kingsley: Yeah, that’s right. So even though – so there’s a bit of a spare capacity.

Michael Savy: That’s right. There is a little bit of capacity.

Ben Kingsley: Similar to Australia but the same sort of problem around – the employment numbers are pretty good but there’s some spare capacity so people are getting …

Michael Savy: The capacity – I think the key term is “utilisation” in that headline on the show that there’s a reduction in unemployment.

Ben Kingsley: Yeah.

Michael Savy: By the type of jobs that are being put on part time and low-skilled work. So there’s an under-utilisation of employment. But even that number has started to tick up a little bit as well which all else being equal would lead to some inflation in wages.

Ben Kingsley: So if we’re looking at a sort of score out of ten, in terms of how you see the economy performing for 2016, what would you give it? Six or seven?

Michael Savy: Yeah, look, let’s call it six, closer to that seven mark in terms of the economy. I think they would be able to sustain their economy reasonably well to absorb any shocks from China.

Ben Kingsley: Yeah.

Michael Savy: But it’s interesting that a few years ago the stock market in the US, we were playing and we were advising clients to buy into the US when the economy was looking a little rubbish.

Ben Kingsley: Yeah.

Michael Savy: The flipside has now occurred where the economy is actually not doing too badly.

Ben Kingsley: Yeah.

Michael Savy: But the concern is this stability of the stock price.

Ben Kingsley: Yeah. So the equity market sort of got ahead of the actual real economy, hasn’t it?

Michael Savy: Yes, that’s right and that’s partly due to the quantitative easing and the increased funds that are available.

Ben Kingsley: OK. That’s interesting. Now you might be hearing through the microphone a little bit of noise. We’ve got some renovations going on here in the building and so we’re starting – we might be picking up on our microphone but we will play on. So equity markets probably not as good as they’ve been and a bit choppier for the US market.

Michael Savy: I think one of the benefits of – and this year coming back to the start of this year, probably last four or five years we’ve seen the equity markets generally have done reasonably well in the first quarter. In part that is due to the fact that a lot of analysts have downgraded expectations and profits.

Ben Kingsley: Yeah.

Michael Savy: And the profits actually came above or beat …

Ben Kingsley: Expectations.

Michael Savy: The expectation.

Ben Kingsley: Yeah.

Michael Savy: Now a lot of that profit came from cost cutting as opposed to revenue.

Ben Kingsley: Yeah.

Michael Savy: So after five years of cost cutting, the question is, “Can the revenue number pick up?”

Ben Kingsley: Yeah.

Michael Savy: Now, if we have a slowdown in China and a possible slowdown in the US, then obviously the revenue comes down then. That’s the concern.

Ben Kingsley: So hence we got really high pay ratios and the reasons we’ve got those is because they’ve’ sort of come off the high points. The expectation is now that the economy is getting into its next cycle of momentum, we’re hoping that the profit numbers raise high which means that the P/E ratios can come up …

Ben Kingsley: Yeah, the P/E ratio just before the new year started in the US was running it around about 18.

Michael Savy: Yeah.

Ben Kingsley: And since the adjustment over the last month, it has actually come off a bit. So it’s approaching closer to the long term average around about 15 at the moment.

Michael Savy: OK, great.

Ben Kingsley: So let’s move on because I think we’ve got a good story there, six to seven for the US economy. Let’s go into China.

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